Collecting Quality Related Cost

8/6/2019 Collecting Quality Related Cost

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Collecting quality related cost data

Introduction

Dale and Plunkett state that the collection and synthesis of quality costs is very much a

matter of searching and shifting through data which have been gathered for other purposes

((1991), Quality Costing, Chapman & Hall, London.Dale and Plunkett, 1991, p. 38).

The cost of quality refers to the total expenditure that an organization incurred for its overall

quality. Campanella (1999, p.4)

Purpose of collecting quality related cost.

To display the importance of quality related cost to top management.The prime purpose of the quality improvement is to gradually eliminate or reduce the cost of poor

quality, i.e. to improve the activities related to the appraisal and failure costs, these data will tell

management the accurate cost of poor quality and indicate which activities are the most expensive

through Pareto analysis.

Accordingly, management can identify the directions and magnitude of the quality improvementopportunities. This information is useful in the investment justification of the quality

improvement alternatives such as investment in prevention activities or equipment.

To show the impact of quality-related activities on business criteria;i.e. prime cost,profit and loss accountsIf scrap costs result from worker errors, the scrap costs are assigned to the processs

overheads. This will provide management with clear pictures of who is causing defects

and how much they cost. In addition, by tracing quality losses to product attributes, parts,

processes, engineering, and vendors, management can take corrective actions toward the

right direction.

To assist in identifying projects and opportunities for improvement.Improvement targets may be set after quality improvement actions are evaluated and selected.

Under this circumstance, improvement targets are set and quality cost budgets are prepared

according to the savings of required activity driver quantities for each quality-activity of the

selected quality improvement actions.

To enable comparison of performance with other division or companiesCollection of Quality related cost enables a company to demonstrate his commitment to

quality and its ability to continuously improve its system.

To establish bases for budgets with view to exercising budgetary control over thewhole quality operation.Some defects are more costly than others and some mean much more to the customers than

others. Thus, the data of quality related can tell the quality department where to concentrate its

quality improvement efforts


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Reasons not collecting quality related cost

A Lack of understsanding of the concept and principles of quality costing amongst the

management team.

An acute lack of information and data

The profitable nature of busisness.

Uses of COQ informationTo identify the magnitude of the quality improvement opportunitiesABC, together with other techniques such as work sampling, can trace resource costs (including

overhead costs) to various activities in a rational way which avoids double-counting.

Thus, ABC can create the accurate costs of PAF-related activities for the PAF approach and of COC-

and CONC-related activities for the process cost approach. The prime purpose of the quality

improvement is to gradually eliminate or reduce the cost of poor quality, i.e. to improve the activities

related to the appraisal and failure costs for the PAF approach and to the CONC for the process cost

approach. ABC will tell management the accurate cost of poor quality and indicate which activities

are the most expensive through Pareto analysis. Accordingly, management can identify the directions

and magnitude of the quality improvement opportunities. This information is useful in the investment

justification of the quality improvement alternatives such as investment in prevention activities or

equipment.

To identify where the quality improvement opportunities existBy integrating the ABC system and the quality system, the cost of poor quality can be traced to its

sources. Hence, the integrated system can identify where the quality improvement opportunities exist

and provide the following benefits (OGuin, 1991, p. 72):

By tracing quality losses to product attributes, parts, processes, engineering, and vendors,

management can take corrective actions toward the right direction.

By tracing and costing vendor returns by vendor and parts, purchasing managers will understand the

true costs of buying from particular vendors. This will avoid forcing purchasing managers to buy

strictly on price. If scrap costs result from worker errors, the scrap costs are assigned to the processs overheads. This

will provide management with clear pictures of who is causing defects and how much they cost.

The integrated system arms the quality department with defect and rework cost information. Some

defects are more costly than others and some mean much more to the customers than others. Thus, the

system can tell the quality department where to concentrate its quality improvement efforts.

By tracing warranty and return costs to their products, it will eliminate the tendency for product

managers to rush a product through testing, or ship defective goods to achieve their sales targets.

Before tracing quality costs to their sources, we should dig out their root causes by using the cost

driver analysis of ABC process view in order to direct improvement efforts to the cause of cost and

avoid treating the symptom. Table IV gives a list of some possible cost drivers of four COQ

components. For example, the root causes of the internal failure rework could be design error,

defective purchased material, deficient tooling and maintenance, and worker error. If we find out thereal root cause of excessive rework cost is defective purchased material, then we could effectively


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solve the problem by helping improve the suppliers quality system or searching another supplier. For

another example, if excessive in-process inspections are due to complex design, then we can

encourage designers to simplify the design by using the number of different part numbers as a

performance measure or activity driver.

To plan the quality improvement programsA quality improvement program should depict quality improvement actions, improvement targets, and

quality cost budgets. Improvement targets may be set after quality improvement actions are evaluated

and selected. Under this circumstance, improvement targets are set and quality cost budgets are

prepared according to the savings of required activity driver quantities for each quality-activity of the

selected quality improvement actions. On the contrary, quality improvement actions may be worked

out according to improvement targets set by management just like the approach of target costing. In

this scenario, management may establish quality improvement targets for every unit of the

organization. Management may request purchasing to reduce vendor quality costs by 20 or 40 percent

in a year. The amount of rework, which is the activity driver of rework activity, may be targeted to be

cut by 30 percent. Target quality costs are derived from the quality improvement targets under the

present operational conditions. Then, various quality improvement actions are evaluated one by one

till the ones, whose budgeted quality costs are not greater than target quality costs, are found. In eithercase, quality cost budgets are constructed incorporating improvement targets by using the budgeted

activity driver quantities based on improved activities and the moving average rates (or the last

periods rate) of activity drivers. This method can be applied in either the PAF approach or the

process cost approach (Sharman, 1996).

To control quality costsSince management establishes quality improvement targets for every unit of the organization,

management can then track actual performance to these targets after one periods operation. If

improvement targets are not met, the variances between actual and budgeted quality costs will

emerge. The variances may represent unanticipated quality loss. The variances force management to

exploit what is causing the variance and encourage management to eliminate the source of quality

loss. This feedback allows management to continuously plan the quality improvement programs and

control quality costs (OGuin, 1991, p. 74).

The method described above is the budget control of quality costs. It may

report quality costs monthly. However, it is not fit for daily operation control.

Turney (1991, pp. 197-9) demonstrated how ABC was used for total quality

control by utilizing daily COQ reporting in a printed circuit board (PCB) plant.

The ABC system was used to prepare a report on the cost of poor quality for

each activity immediately after each of the three daily shifts and to show

graphically the trend in physical defects and cost. The report allows

management to focus immediately on the quality problems with the biggest

cost impact. The ABC system also prepared daily a top ten offenders list that

reports the ten products with the highest cost of poor quality on the previous

day. It pinpointed the poor quality products and provided the greatest potentialfor redemption. When a product unit on this list was scrapped, a report, which

showed the cause of the problem as well as the cost, was prepared and sent to

the person most likely to correct the problem. This use of ABC made quality

problems visible within a matter of hours, or even minutes. Turney suggested

linking ABC with computer-integrated manufacturing (CIM) to prepare COQ

reports for real-time and cost-effective control.

Documents

Collecting Quality Related Cost