qc wk 1.1f[1]
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QUALITY COSTING
QUALITY COSTINGQUALITY COSTING
Quality Cost :The expenditure incurred by theproducer, by the user and by the community,associated with product or service quality. (BS
4778-2)
Quality Related cost : The expenditure incurred
in defect prevention and appraisal activities plusthe losses due to internal and external failure.(BS 4778-2)
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THE ROLE OF QUALITY COSTING IN TOTALTHE ROLE OF QUALITY COSTING IN TOTAL
QUALITY MANAGEMENTQUALITY MANAGEMENT
What is TQM?
A management philosophy embracing all activitiesthrough which the needs and expectations of the
customer and the community, and the objectivesof the organization are satisfied in the mostefficient and cost effective way by maximizing the
potential of all employees in a continuing drivefor improvement.( BS 4478: Part 2)
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THE ROLE OF QUALITY COSTING IN TOTALTHE ROLE OF QUALITY COSTING IN TOTAL
QUALITY MANAGEMENTQUALITY MANAGEMENT
The evolution of Quality
Management.
The importance of Quality in aBusiness context.
The case for quality costing.
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QUALITYQUALITY
MANAGEMENTMANAGEMENT
QUALITY COSTING
Coordinated activities to direct and control an organization withregard to quality. (ISO 9000:2005)
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DEFINITIONS OF QUALITYDEFINITIONS OF QUALITY
Quality is fitness for use (Juran)
Quality is conformance to requirements (Crosby)
Quality should be aimed at the needs of the
consumer, present and future (Deming)
Quality is the loss a product causes to societyafter being shipped, other than any losses caused
by its intrinsic functions. (Taguchi)
QUALITY COSTING
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Definition of Quality (ISODefinition of Quality (ISO
9000:2005)9000:2005) Degree to which a set of inherent characteristics
fulfils requirements
Note1. the term quality can be used with adjectivessuch as poor, good or excellent.
Note2. inherent, as opposed to assigned, meansexisting in something, especially as a permanentcharacteristics.
Note3.requirement need or expectation that isstated, generally implied or obligatory
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What is a Quality product?What is a Quality product? Has the right configuration according to
specifications
Is reliable
Is delivered on time
Does what it is supposed to do
QUALITY COSTING
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WHY QUALITY?WHY QUALITY? MORAL ASPECTS
We do not want to make products that will harm or kill someone
TO COMPLY WITH EXTERNAL REQUIREMENTS
TO AVOID PRODUCT LIABILITY
LACK OF QUALITY COSTS MONEY
MARKETING
QUALITY COSTING
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EVOLUTION OF QUALITYEVOLUTION OF QUALITY Inspection Activities such as measuring, examining,
testing, gauging one or more characteristics of a product or
service and comparing these with specified requirements todetermine conformity
Quality control part of quality management focused on
fulfilling quality requirements
Quality assurance part of quality management focused onproviding confidence that quality requirements will be
fulfilled.
Quality Management - Coordinated activities to direct andcontrol an organization with regard to quality
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EVOLUTION OF QUALITYEVOLUTION OF QUALITY TQM- A management philosophy embracing all
activities through which the needs andexpectations of the customer and the community,and the objectives of the organization aresatisfied in the most efficient and cost effective
way by maximizing the potential of all employeesin a continuing drive for improvement.
( BS 4478: Part 2)
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EVOLUTION OF QUALITYEVOLUTION OF QUALITY QUALITY INSPECTION / CONTROL
Too late 100% inspection do not work
Expensive
Inspector Scrap, rework, unhappy customers
Creates a barrier between operator and customer
INPUT OUTPUTINSPECTIONPROCESS
REWORK
SCRAP
QUALITY COSTING
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EVOLUTION OF QUALITYEVOLUTION OF QUALITY QUALITY TOOLS ASSURANCE
QUALITY CANNOT BE INSPECTED INTO A PRODUCT QUALITY
HAS TO BE BUILT INTO EACH PROCESS
INPUTOUTPUT
PROCESS
QUALITY
TOOLS(SPC)
QUALITY COSTING
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INTRODUCTIONINTRODUCTION
What is the cost of quality?
Does it raise the price of goods andservices?
Are huge savings possible byimplementing continual improvement
efforts?
QUALITY COSTING
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MEANING OF QUALITY COSTSMEANING OF QUALITY COSTS
DIFFERENT INTERPRETATIONS:
COSTS OF ATTAINING QUALITY
COSTS OF RUNNING THE QUALITYDEPARTMENT
COST OF POOR QUALITY
QUALITY COSTING
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DEFINITIONDEFINITION -- QUALITY COSTSQUALITY COSTSQUALITY COSTS are the total of the cost incurred by:
Investing in the prevention of non-conformance to
requirements Appraising a product or service for conformance to
requirements
Failing to meet requirements
Total Quality Costs= prevention costs+ failure costs +
appraisal costs
QUALITY COSTING
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WHY ZERO DEFECTS?WHY ZERO DEFECTS?ASK YOURSELF
IS IT NECESSARY TO GO FOR ZERO
DEFECTS?
WHY ISNT 99.9% GOOD ENOUGH?
QUALITY COSTING
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WHY ZERO DEFECTS?WHY ZERO DEFECTS? FIVE MINUTES OF UNSAFE DRINKING WATER
EVERY MONTH!
TWO UNSAFE LANDINGS PER WEEK AT ONE OFTHE BUSIEST AIRPORT!
QUALITY COSTING
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WHY ZERO DEFECTS?WHY ZERO DEFECTS?
SUDDENLY THE QUESTFOR
ZERO DEFECTSMAKES A LOT MORE SENSE!
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WHY QUALITY COSTS?WHY QUALITY COSTS? SPEAK IN MONETARY TERMS
QUANTIFY THE SIZE OF THE QUALITY PROBLEM INA LANGUAGE THAT WILL HAVE AN IMPACT ONTOP MANAGEMENT.
THE OVERALL SIZE OF QUALITY COSTS
THEIR PREVALENCE IN AREAS BEYOND MANUFACTURE
THE MAJOR AREAS FOR IMPROVEMENT
QUALITY COSTING
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WHY QUALITY COSTS?WHY QUALITY COSTS? IDENTIFY MAJOR OPPORTUNITIES FOR COST
REDUCTION
IDENTIFY OPPORTUNITIES FOR REDUCINGCUSTOMER DISSATISFACTION AND ASSOCIATED
THREATS TO INCREASE SALES
EXPAND BUDGETARY AND COST CONTROLS
STIMULATE IMPROVEMENT THROUGHPUBLICATION
QUALITY COSTING
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WHY QUALITY COSTS?WHY QUALITY COSTS?
More and more companies arediscovering that controlling the
cost of quality helpseliminate problems, reduce excess
inventory and increasecommunication.(P. Crosby)
QUALITY COSTING
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTS
QUALITY COSTING
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SIGNIFICANCE OF QUALITYSIGNIFICANCE OF QUALITY
COSTSCOSTS QUALITY COSTS COME RIGHT OFF
YOUR BOTTOM LINE
QUALITY COSTS CAN BE UP TO 30%
OF COMPANY TURNOVER
JURAN CALLS THIS AS THE GOLDIN THE MINE
QUALITY COSTING
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSLike all things there is a price to pay for
quality. This total cost can be split into twofundamental areas: Non Conformance.
This area covers the price paid by not havingquality systems or a quality product.
Conformance.Conformance is an aim of quality assurance.This aim is achieved at a price.
QUALITY COSTING
CATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSNON-CONFORMANCE:
INTERNAL FAILURE COSTS
EXTERNAL FAILURE COSTS
QUALITY COSTING
C GO S O QCATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSINTERNAL FAILURE COSTS
SCRAP
REWORK
FAILURE ANALYSIS
REINSPECTION / RETEST
DOWNGRADING
DOWNTIME
QUALITY COSTING
CATEGORIES OF QUALITYCATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSEXTERNAL FAILURE COSTS
WARRANTY CHARGES
COMPLAINT ADJUSTMENT
RETURNED MATERIAL
ALLOWANCES
RECALL
QUALITY COSTING
CATEGORIES OF QUALITYCATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSCONFORMANCE:
APPRAISAL COSTS
PREVENTION COSTS
QUALITY COSTING
CATEGORIES OF QUALITYCATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSAPPRAISAL COSTS(Costs incurred to determine the
degree of conformance to qualityrequirements) Incoming inspection and test
In-process inspection and test
Final inspection and test
Product quality auditMaintaining accuracy of test accuracy
Inspection and test materialsQUALITY COSTING
CATEGORIES OF QUALITYCATEGORIES OF QUALITY
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CATEGORIES OF QUALITYCATEGORIES OF QUALITY
COSTSCOSTSPREVENTION COSTS
(Costs incurred to keep failure and appraisalcosts to a minimum)
Quality planning New products review
Process planning Process control Quality audits
Supplier quality evaluation Training Preventive maintenance
QUALITY COSTING
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Quality Cost ElementsQuality Cost ElementsQuality Cost Elements are the detailed functions,
tasks, or expenses which, when properly
combined, make up the quality cost categories.
For e.g. quality planning is an element of
prevention, in-process inspection is an element ofappraisal, rework is an element of (?), andcustomer returns are an element of external
failure costs.
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Quality Cost ElementsQuality Cost ElementsThe elements making quality cost categories are
different from industry to industry.
Quality Cost Elements in health care differ significantlyfrom those in manufacturing.
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Quality Cost ElementsQuality Cost ElementsIn developing detailed elements for your organization,the approach taken is to describe the activities or
work being performed, which can be consideredquality costs- i.e. work that would not have to beperformed if quality were, always would be, perfect.
Using the category definitions as a guide, fit thesetasks into proper categories. For e.g. if the task is
being accomplished to prevent poor quality, the costof the task is a prevention cost.
Quality Cost BasesQuality Cost Bases
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Quality Cost BasesQuality Cost Bases
The prime value of a quality cost system is identifyingopportunities for improvement and then providing ameasurement of that improvement over time.
Since the volume of business in total, or in any particularproduct or service line, will vary with time, realdifferences (improvements) in the cost of quality canbest be measured as a percent of, or in relation to a
base.
The base should be representative of, and sensitive to,
fluctuations in business activity.
Quality Cost BasesQuality Cost Bases
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Quality Cost BasesQuality Cost Bases
Measurement bases against which quality costsmay be compared
A labour base- such as total labour, direct labour
A sales base such as net sales billed or sales valueof finished goods/services
A unit base such as the number of units produced,the number of services performed, or the volume ofoutput
Quality Cost BasesQuality Cost Bases
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Quality Cost BasesQuality Cost Bases
For effective use of a quality cost system, it is preferable to havemore than one base. For long-range planning purposes, totalquality costs as a percent of net sales is used. For current,ongoing applications, the bases selected should be related to
the specific areas for improvement.
Internal failure costs as a percent of total production/servicecosts
External failure costs as an average of net sales
Procurement appraisal costs as a percent of total purchased
material costs.
Quality CostQuality Cost
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Quality CostQuality Cost
YEARYEAR
19991999 20002000 20012001 20022002
Quality CostsQuality Costs
PreventionPrevention $ 27,000$ 27,000 41,50041,500 74,60074,600 112,300112,300
AppraisalAppraisal 155,000155,000 122,500122,500 113,400113,400 107,000107,000
Internal failureInternal failure 386,400386,400 469,200469,200 347,800347,800 219,100219,100
External failureExternal failure 242,000242,000 196,000196,000 103,500103,500 106,000106,000
TotalTotal $ 810,400$ 810,400 829,200829,200 639,300639,300 544,400544,400
Accounting MeasuresAccounting Measures
SalesSales $ 4,360,000$ 4,360,000 4,450,0004,450,000 5,050,0005,050,000 5,190,0005,190,000
Mfg costsMfg costs 1,760,0001,760,000 1,810,0001,810,000 1,880,0001,880,000 1,890,0001,890,000
Quality Costs and IndexQuality Costs and Index
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Quality Costs and IndexQuality Costs and Index
Quality index = (100)
total quality costs
base
Quality cost per sale = = 18.58$810,400(100)
4,360,000QUALITY QUALITY MANUFACTURING
YEAR SALES INDEX COST INDEX
1999 18.58 46.042000 18.63 45.182001 12.66 34.002002 10.49 28.80
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HOW DO WE IMPROVE?HOW DO WE IMPROVE? EFFICIENCY Relationship between
the result achieved and theresources used.(ISO 9000:2005) DOING THE SAME THINGS WE DO NOW, BUT WITH FEWER RESOURCES
EFFECTIVENESS- Extent to whichplanned activities are realized and
planned results achieved. (ISO 9000:2005) DOING THINGS WHICH ARE MORE SUITED TO THE NEEDS OF THE BUSINESS
THAN THE ONES WE DO NOW.
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QualityQualityCost RelationshipCost Relationship
Increased prevention costs lead toIncreased prevention costs lead to
decreased failure costsdecreased failure costs
Improved quality leads toImproved quality leads to
increased sales and market shareincreased sales and market shareQuality improvement at the designQuality improvement at the design
stagestageHigher quality products canHigher quality products can
command higher pricescommand higher prices
Quality costs reductionQuality costs reduction
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It helps businessto:
Satisfy therequirements oftheir customers.
Makes the workof their
employees moreinteresting.
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SummarySummary Quality cost cannot eliminate the
costs of non-conformance, it is only atool to measure.
Quality cost is measure ofeffectiveness and efficiency of a
Quality Improvement Programme
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EXERCISE 1EXERCISE 1COMPARE THE EXTERNAL FAILURE COSTS BORNE BY THE BUYERAND THE SELLER
Technical support calls
Preparation of support answer books
fix releases
Shipping of updated product
Added expense of supporting multiple versions of the product in the field
Wasted time
Lost data
Investigation of customer complaints
Refunds and recalls
Coding / testing of interim bug
Lost business
EmbarrassmentFrustrated employees quit
Demos or presentations to potential customers fail because of the software
Failure when attempting other tasks that can only be done once
QUALITY COSTING
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SOLUTIONSOLUTIONSe l ler : ex t e rna l f a i l u re cos ts These are the types of costs absorbed bythe seller that releases a defectiveproduct.
Cust om er : fa i lu r e cost s
These are the types of costs absorbed bythe customer who buys a defectiveproduct.
QUALITY COSTING
EXERCISE 2EXERCISE 2
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ASSIGNING QUALITY COSTS TO THE APPROPRIATE CATEGORY
A textile manufacturer was attempting to calculate its quality-related costs for the first time. Themanagers decided that the following activities were quality costs:
Administration, audit and improvement
Air conditioning
Calibration and maintenance of production equipment used to evaluate quality
Colour matchingscrap
Complaints handling
Downgrading
Inspection and test
Production operators
How would you classify each of these elements?
A prevention cost? (P)
An appraisal cost? (A)
An internal failure cost?( I)
An external failure cost? (E)
Not a quality cost at all? (N)
Write the code for your answer(P, A, I, E or E) against each element.
EXERCISE 3EXERCISE 3
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RANKING PRIORITIES FOR ACTIONRANKING PRIORITIES FOR ACTION
An organisation obtains this failure cost information on itsdifferent product lines:
PRODUCT FAILURE COSTS $ MANUFACTURING
COST $
FAILURE COSTS AS
% MANUFACTURINGCOSTS
A 45,000 1,350,000 3.3
B 30,000 400,000 7.5
C 5,600 100,000 5.6
D 5,000 27,500 18.2
E 3,300 300,000 1.1
Which product line(s) should be given top priority for investigating andReducing failure costs? Ring your choice(s) in the product column.
Give explanations for your answers.
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Thank You for your attention.