QUALITY

INTRODUCTION
 Current global competitive environment requires
companies to become customer driver and
making customer satisfaction a key priority.
 This is so because customers are demanding over
improving levels of service regarding cost,
quality, reliability, delivery and the choice of
innovative new products.
 Companies that develop a reputation of low quality
products loss market share and face declining profits
 A quality product results in no defects.
 Defective products results in high warrant costs and
dissatisfied customers.
 Garrison (2006) note ‘”that customers who have bad
experience tell approximately 11 people about it” -
and is the worst form of advertising.
 Eliminating inferior quality can therefore result in
substantial savings and higher revenues.


DEFINING QUALITY COSTS
 TOTAL QUALITY MANAGEMENT (TQM)

 Refers to a process where all business functions are

TOTAL QUALITY MANAGEMENT
(T Q M)

involved in a process of continuous quality

improvement.
 TQM is not a technique, a broad management
approach or methodology dealing with processes
and attitudes.
 T Q M besides focusing on statistical monitoring of
manufacturing process now includes customer
oriented process of continuous improvement that
focuses on delivering products or services of
 Initially developed for manufacturing
organisations but now suits any environment
such as a university—cut has a director of
quality who regulates quality issues.
 It is cheaper now to produce quality product
than producing inferior products which result
in excessive expenditure on inspection,
rework, scrap and warranty repairs.
 T Q M therefore focuses on designing on
building quality rather than trying to inspect
focusing on causes rather than symptoms of
poor quality.
 Principles of TQM
 Continuous improvement
 Involves achieving excellence in an incremental way
 It is an ongoing process
 Employees involvement-need continuous training
and motivation to consistently achieve better and
better quality .
 Customer involvement
 Commitment of top management
 Their willingness and participation must be clear and
visibly seen by all.
 Supplier relationships
 TQM aims to prevent and allow immediate
detection of errors and problems solved at root
source rather than correction of problems after their
occurrence.
 Thus quality designs works better than inspection
quality after poor designs.
 TQM attempts to expose problems rather than hide
or burry them.
 TQM- creates, encourages and nurtures simplicity,
instead of bureaucratic approach of adding controls.
 It attempts to identify and eliminate non-value
added activities thus naturally motivating people to
use quality procedures.
 Thus it is better and hence it is cheaper to do every
process right at first time, rather than not to do it
right then correct it afterwards.
 TQM practices include the use of statistical
process control ,customer focus, and
interfunctional design efforts and quality
performance measures include customer’s
perception of quality, defects in parts per million
and the percentage of units that pass through final
inspection without requiring rework.
 TQM practices leads to improved JIT performance
by reducing manufacturing process variance.
 Variance reduction permits stock safety
inventory reduction and yields shorter cycle
times, both standard measures of JIT
performance through elimination of rework.
JUST IN TIME SYSTEM(JIT)
 Is a management philosophy aimed at eliminating
manufacturing waste by producing only the right amount
and contribution of parts at the right place at the right
time.
 JIT aims to minimise the presence of non-value adding
operations and non-moving inventories in the production
line.
 The result is shorter throughout times better on –time
delivery performance, higher equipment utilisation,
lesser space requirement, lower costs and greater profits
 Founded in Japan in the 1970s.
 It was developed and perfected by Taiichi Ohno of
Toyota and he is now referred as the father of JIT.
 JIT aims to achieve zero inventories , minimal
work in progress through the entire supply chain.
 JIT practices include set up time reduction,
schedule flexibility and use of Kanban.
 JIT performance can be measured by inventory
turnover, cycle time, lead time, delivery
performance and other measures
 JIT aims at eliminating waste through
simplification of manufacturing process.
 MAJOR OBJECTIVES OF JIT
 Increasing the organisation ‘s ability to compete with
and remain competitive over long run.
Competitiveness is increased by use of JIT
manufacturing process as they can develop a more
optimal process for the firm.
 Increasing efficiency within the production process.
Efficiency is obtained through the increase of
productivity and decrease of cost.
 Reducing wasted materials, time and effort which in
turn help reduce costs.
 OTHER BENEFITS
 Identify and respond to consumer needs.
 Optimal quality/cost relationship-eliminate large
amount of resources and efforts in inspection and
reworking the production of defected goods.
 Development of a reliable relationship between
suppliers
 Plant design for maximizing efficiency.
 Adopting the work for continuous improvement
 Reduce unwanted waste- JIT eliminates waste
from over production, waiting time,
transportation waste and inventory waste,
waste of motion and waste from defects.
BASIC ELEMENTS OF JIT
 PEOPLE involvement
 Maintaining a good support and agreement from
people involved in production.
 Reduces time and effort in implementation of JIT
and minimises chances of creating implementation
problems.
 Maximising people ‘s involvement carry through
introduction of quality circles and total
involvement concept.
 Management gets support from stockholders and
owners of the company, labour organisation,
management support and government support.
 PLANTS –certain specifications are needed to
implement JIT such as:
 Plant layout-allow maximum working flexibility-
use of “multifunctional workers”.
 Demand pull production- producing only when
order is received.
 Kanban-use of card or tag system
 Self improvement
 Continuous improvement
 SYSTEM-
 Technology and process that combines the
different processes and activities together. –
Material Requirement Planning and
Manufacturing Resource planning.
 When Just In Time is in use, the following
goals can be achieved:


 Elimination of non-value added activities

 Zero inventory (no buff inventory)
 Zero defects
 Both sizes of one
 Zero breakdowns
 100% on time delivery service.

 NB Though the above targets may not be
achieved in real life situation the aim is to
strive to achieve them so as to realize
substantial savings.


 Elimination of non-value added activities

 Just in Time aims to eliminate waste.
 Waste is anything that does not add value to a
product.
 The lead or cycle time for manufacturing or
selling a product consists of process time,
inspection time, move time queue time and
storage time but only process time adds value
to product with all other adding cost only.
 Adopting Just in Time philosophy and
focusing on reducing lead times total costs can
greatly be reduced.

 GROUP 25
 E and E ltd produces a range of products. The company
recently upgraded its production facilities to modern
standards replacing labour intensive system. While
problems existed initially the new system has performed
well to E and E ltd’s specifications.
 However , Eand E’s customers have complained of on
going problems in terms of quality and late deliveries. Mr
Emmanuel the Chief executive officer is disturbed at the
second issue as he had authorised a huge increase in the
level of work in progress inventory to keep the new system
at full capacity.
 At a recent strategic conference in Dubai , he
heard of TQM and JIT production. He is now
in the middle of the road as to whether these
philosophies might be the answer to E and E
ltd .
 Required
 You have been appointed the management
accountant of E and E ltd, advise Mr
Emmanuel on the scope for TQM and JIT to
solve the problems faced by customers. (25
marks.)
DEFINING COSTS OF QUALITY
 These are costs that include:
 Preventing problems in manufacturing
 Measuring ,controlling, and or inspecting quality levels.
 Failing to accomplish desired quality levels or any cost
that is expended when quality is less than what is
needed.
 Quality cost are cost that are incurred to prevent
defective products from falling into the hands of
customers or that are incurred as a result of defective
units.
TYPES OF QUALITY COSTS

PREVENTION
APPRISAL

FAILURE COSTS/ NON

CONFORMANCE COSTS

INTERNAL EXTERNAL
 Quality costs are divided into four groups two
of which are prevention and appraised costs
(incurred to in an effort to keep defective
products from falling into customer’s
hands)and internal failure costs and external
failure costs (incurred for the failure to prevent
defects despite efforts).
PREVENTION COSTS
 Are costs incurred to keep defects from occurring?
 It therefore relates to any activity that reduces the
number of defects in products or services.
 They includes costs of :
 preventative maintenance, risk management
 quality audit and planning and training,
 system development, process improvement
 quality engineering, product development
 quality circles, statistical process control activities,
and the extra costs of acquiring higher quality raw
material, technical support to suppliers.
 QUALITY CIRCLES
 Consist of small groups of employees that meet on a
regular basis to discuss ways to improve the quality
of output (includes both management and workers)


 STATISTICAL CONTROL PROCESS

 Is a technique used to detect whether a process is in
or out of control. An out of control result in
defective units and may be caused by a
miscalibrated machine or some other factor.
 In this method workers use charts to monitor the
quality of units that pass through their work stations.
 By using charts workers can quickly spot
processes that are out of control and creating
defects.
 Problems are then corrected immediately
thereby preventing further defects rather than
waiting for an inspection to catch defects.
 JIT systems can be employed as support
systems to suppliers.(see inside)
APPRAISAL COSTS
 Costs for evaluating quality of work after it has
been performed.
 For measuring, evaluating and auditing to ensure
conformance to requirements.
 To “catch and correct” problems and errors
before harm to work force.
 On going competence assessment
 Calibration-accurracy of measuring equipment
 Inspection of samples and reagents-quality input
testing methods.
 Quality control(ensuring testing methods are
working and results are valid.
 Proficiency testing- ensures method performance
compares to peers.
 External accreditations- ensuring lab
performance to minimum standards.
 It should be noted that appraisal activities focus
on symptoms rather on causes and they do
nothing to reduce the number of defective items.
 However appraisal activities do bring defects to
the attention of management, which may head
to efforts to increase prevention activities so that
defects do not happen
 INTERNAL FAILURE COSTS
 Are costs associated with materials and
products that fail to meet quality standard
 These cost result from identification of defect
during the appraisal process.
 Examples of such cost include scrap, rejected
products, reworking of defective units, delay
time caused by quality problems.
 Re-testing, downtime, expired reagents or
methods, invalid instruments runs.
 EXTERNAL FAILURE COSTS
 Costs that result when a defective product is
delivered to a customer.
 Examples of cost in this Category include
warranty repairs and replacement, products
recalls e.g Toyota in 2011 call over 20 000
defective cars which were on the market.
 Lawsuits, repairs and redoing services,
warranties, or penalties, returned products.
 NB. POOR QUALITY IS NOT FREE.
 EVERYTIME WORK IS REDONE THE
QUALITY INCREASES.
 The company suffered Liability arising from legal
action against a company and lost sales arising
from a reputation of poor quality.
 When these costs are incurred they can devastate
profits.
 DISTRIBUTION OF QUALITY COSTS
 Studies in United States shows cost of quality to
range between 10% and 20% of total sales where
as experts say these range between 2% and 4%.
 When the quality of Conformance is Low, total
quality cost is high due to costs Internal external
failure costs.
 A low quality of Conformance means a high
percentage of units are defective and have high
failure costs.
 However, as the Company Spends more and more on
prevention and prevention, the percentage of
defective units drops and hence Low Internal and
External failure cost
 close to zero.
 The best way to prevent defects from happening to
design Some experts and managers Contend that the
total quality cost is not minimized until quality of
Conformance approach 100% and defect rates get as
low as 1 in a million Units .
 Others argue that eventually total quality cost
increase as the quality of Conformance
increases or approaches 100% and defect rates
are very processes that reduce the Likelihood
of defects and to continually monitor processes
using statistical process Control method.
QUALITY COSTS REPORTS
 These provide an estimate of the financial
Consequences of the company’s current level
of defects.
 It details the prevention costs, approval costs,
and costs of Internal and external failure that
arise from the company’s current level of
defective products and services

 Uses of quality cost information
 Helps managers to see the financial significance
of defects as they may not be aware of the
magnitude since such costs cut across
departmental lines and are not normally tracked
and accumulated by the cost system.
 It also helps managers identify the relative
importance of the quality problems faced by the
firm i.e. the report may show that scrap is a
major quality problem or that the company is
having huge warranty costs giving managers a
better idea of where to focus efforts.
 It also helps managers to see whether their
quality costs are poorly distributed. In general
quality costs should be distributed more
towards prevention and appraisal activities and
less towards failures.
 Limitations of cost of quality information
 Simply measuring and reporting quality cost
does not solve quality problems
 Results usually lag behind quality
improvement programs.
 Total quality cost may even increase as quality
control system designed and installed.
Decreases in the cost may not begin to occur
until the quality program has been in effect for
a year or more.
 The most important quality cost, lost sales
arising from customers’ ill will, is normally
omitted from the quality cost report because it
is difficult to quantify
INTERNATIONAL ASPECT OF QUALITY

 The Japanese companies borrowed heavily

from the work of W. Edwards Deming and
introduced quality circles, JIT, the idea that
quality is everyone’s responsibility, and the
emphasis on prevention rather than an
inspection.
 In the 1980s, quality re-emerged as a pivotal
factor in the market and hence need to have a
strong quality program in place.
THE I. S. O 9 000 STANDARDS
(INTERNATIONAL STANDARDS
ORGANISATION)
 Is based in Geneva, Switzerland established quality
control guidelines.
 To get certification producer must demonstrate that
 A quality control system is in use, and the system clearly
defines an expected level of quality.
 The system is fully operational and is backed up with
detailed documentation of quality control procedures.
 The intended level of quality is being achieved on a
sustained; consistent basis
 Documentation is important here, that is it should be
detailed precise that if all the employees in a
company were suddenly replaced, the new
employees could us the documentation to make the
product exactly as it was made by the old employees.
 I.S.O certification is not limited to manufacturing
companies only.

 *Give examples in Zimbabwe of C O.S that attained I.S.O



BENEFITS OF CERTIFICATION
 Meet Customer Requirements
 Many companies want ISO 9001 certification just to
satisfy one customer requirement.
 The customer states that it will only do business with vendors
that are certified as ISO 9001 compliant, so to get (or keep) the
business they need that certification.
 The problem with these companies is that they’re looking for a
short-term payoff.
 They see nothing but that one benefit — we need money — and
ignore the long-term benefits, like “if we keep the customer well
satisfied, they will want to come back again and again”.
 They don’t embrace the concept of quality through continual
improvement.
 They don’t understand that continued customer satisfaction is
the ultimate goal of a QMS.

 In other words, these companies haven’t “bought into the

program”.
 See, you may obtain a piece of paper (that ISO certificate)
that claims ISO 9001 certification without seeing much
actual quality or improvement.
 Focusing only on that one benefit — your immediate gain —
without putting the customer in front will end up costing
you much more in the long run.

 Get More Revenue and Business from New Customers
 Once you earn your ISO 9001 certification, you can advertise your
quality certification and respond to requests for quotes (RFQ) from
companies that make ISO 9001 certification a “must-have”. ISO
9001 certification can open up new markets you were virtually
unable to do business with before your certification.
 Improve Company and Product Quality
 A quality management system standard is all about quality (really!)
so, of course, one result of adopting a QMS should be an improved
level of quality for the entire organization — every process, and
every product.
 Philip Crosby and Joseph Juran provides two of the best. Crosby
defined it as “conformance to requirements”;
 Juran called it “fitness for use”. A well-designed, effectively
implemented ISO 9001 Quality Management System will put your
company on the Road to Quality.
 Increase Customer Satisfaction with your Products
 Quality means whatever you produce will work as your customers expect.
 Quality also means far fewer complaints and doing a better job of
resolving those you do.
 If your quality management system is working correctly, you should know
what your customers expect and you should be providing it, resulting in
increased customer satisfaction.
 5. Describe, Understand, and Communicate Your Company Processes
 The ISO 9001 QMS standard requires that you identify and describe your
processes using business metrics, the purpose of which is to better manage
and control your business processes.
 Quality objectives form the center of your system.
 Metrics are used to understand and communicate your system’s
performance relative to your quality objectives.
 If you make an honest attempt to conform to the requirements of getting
ISO 9001 certification, you’ll learn more about your business.
 Improve the Consistency of Your Operations
 What is consistency? Well, one way to think of it is
“decreased variation”.
 Reducing the variation in your processes is the definition of
consistency.
 Is your customer better served by you supplying them with
a consistent product — same dimensions, same weight,
same tolerances, same output every time — or by your
products being unpredictable and “all over the place”?
 Increase control of your processes! Control comes from
having a clear target to shoot for (objective), collecting data
on the process (metrics), and understanding how to adjust
the process (procedures and work instructions) to maintain
the target output.

 Focus Management and Employees
 The ISO 9001 QMS has a way to ensure the
company stays focused, and that’s quality
auditing.
 Internal audits, registration (and surveillance)
audits, and self-process audits.
 ISO 9001 certification requires that the company
periodically audit its quality processes.
 Regular process audits and as-needed audits,
when done correctly, provide the objective
feedback needed to correct any deviations from
the quality path and keep the company
 Develop a Professional Culture and Better
Employee Morale
 Implementing an ISO 9001 Quality
Management System can empower employees.
 Your QMS will provide them with clear
expectations (quality objectives and job
descriptions), the tools to do their job
(procedures and work instructions), and prompt,
actionable feedback on their performance
(process metrics).
 The result? An improved company culture and a
more professional staff!
 Improve Efficiency, Reduce Waste, and Save Money
 An ISO 9001 Quality Management System isn’t perfect; no
process and no one is perfect.
 A well-run QMS does enable your company
to approach perfection.
 As your processes improve, become more consistent, and you
achieve your target objectives with greater regularity, you will
see tangible results.
 Your process waste will decrease, for one.
 Waste is money lost forever. Waste results from poor quality
and inefficiency.
 Inefficiency results from variation and inconsistent processes.
 Reduce variation, improve consistency, and you’ll have less
waste…and more money.
 Achieve International Quality Recognition
 ISO 9001 is a worldwide standard
administered by the
International Organization for Standardization
(ISO), based in Switzerland.
 ISO 9001 is currently in use by over one
million organizations around the world!
 It is truly a world wide standard for quality!
 Obtaining ISO 9001 certification puts your
company in a very select group.
TOTAL QUALITY MANAGEMENT AND IT’S
IMPLICATIONS FOR MANAGEMENT
ACCOUNTANTS

 Total quality management (TQM), as an approach,

has its foundations in Japan. It is based on the
writings of a few insightful individuals, such as
Demming and Juran, who identified that an important
aspect of success was delivering quality products and
services to customers. To achieve this, a quality focus
must permeate throughout the entire organisation and
not just in a few areas.
 TQM has many elements and it is not an easy
approach to implement as it can be expensive and
require many organizational changes. Some of
these elements are:


 Customer involvement – Quality is defined by the

customer, not by the company. As a result, to be
quality focused, it is essential to find out what the
customer wants and try to deliver this in a cost-
effective way. This involves eliminating items that
are not valued and concentrating on those that are.

DEVELOP LONG TERM SUPPLIER RELATIONSHIPS

 – TQM, on one level, looks beyond the company, but

also requires us to look backwards as well.
 To make a quality product requires quality inputs and
this is helped through close working with suppliers.
 This can involve helping suppliers to implement TQM
in their own organisation, identifying ways of saving
money and assisting with training.
 The incentive for the supplier is a long term contract –
the incentive for the recipient is targeted cost reductions
as part of the contract.
 Empowering employees – TQM requires a culture
change in many Western businesses, where the
employees are given considerable power and
authority. We rely on employees to be their own
quality controllers and give them the ability to stop
production if problems arise – this requires trust.
 Quality circles are formed, where teams of
employees are given the freedom to find solutions
to problems and to come up with their own
methods.
 Clearly, much of TQM is production-based as can
be seen by some of the elements above
 The changes that TQM brings results in
amendments to processes and products and how the
factory operates.
 However, TQM is much more than this – it is a
‘whole-company’ philosophy, meaning that all
functions must embrace the approach and thinking
for it to work.
 For example, there is no point in production having
top quality products coming out if the after-sales
service is of poor quality and discourages customers
from purchasing.
 As with other functions, management accountants
(MA) are affected by TQM being implemented.
 It is essential for MA’s to be involved in the
implementation process itself so that the final
system allows them to perform their key duty
of providing management information their
key duty of providing management
information.
 Otherwise, MA’s risk being marginalised. In
fact, a well devised system, using IT, can make
information provision easier and allow the MA
to involve themselves in more analysis i.e.
interpreting the data, rather than just reporting
it.
 The performance measures under TQM are
quite different to those applied by traditional
companies.
 While profit and return on investment continue
to be highly relevant, actual measures of quality
(which are components of profit anyway) must
be taken and reported.
 The measurements themselves may be
automated or taken by others such as
production or marketing, but many companies
require the MA to consolidate this information
into management reports.
 This allows for better comparison across
measures, such that discrepancies in one may
be explained by differences in another.
 Examples of such measures would be vendor
performance (frequency of defects, time to
deliver) and customer satisfaction (customer
surveys, time to resolve complaints).

 The MA attempts to express these measures of quality in
quantitative form to make them more understandable and
unbiased.
 This also means that, where low measures are found (for
example, slow delivery or low satisfaction ratings), the
profit impact can be quickly determined of making (or not
making) a change.


 Cost of quality reports are a key aspect of TQM and are

often used as a basis for deciding on whether to
implement the approach or not.
 These reports are prepared by the MA from information
from many different departments and show how much the
company will need to spend if it tries to:
 Prevent quality problems – implementing TQM,
equipment change, training
 Resolve issues through Appraisal – ‘inspecting in’
quality by testing incoming materials and finished
goods
 Ignore problems and allow products to Fail – scrap
and rework lost contribution and reputation
 This is a wide-ranging and holistic investigation and
looks at all
 . It is an important task for the MA to perform as the
discipline and ability to deal with numbers are
important traits of accountants.

 Benchmarking ‘world-class’ companies to
establish and implement best practices is
another element of TQM and the MA needs to
be involved here.
 The MA can assist in the research process to
establish if such practices are viable and cost-
effective – this is referred to as a ‘Cost-Benefit
Analysis’.
 Indeed, this is an important overall exercise that
goes beyond the Cost of Quality report (which is
more to do with ongoing/running costs).
 Implementing TQM is likely to require
considerable capital investment (to update
machinery and amend factory layout to
facilitate easy movement) and training (at all
levels) and this can be very expensive,
particularly as training may be required for
quite some time before full implementation
has been achieved.
 Resistance can be expected and it is important
for the MA to be able to demonstrate that, if it
is the case, TQM implementation will recover
the investment in it
 As the above illustrates, TQM is a complex and
wide-ranging philosophy that has implications
for the entire organisation.
 The effect that TQM implementation has on the
role and function of the MA can be both short-
term (CBA) and long-term (change in
reporting) and this makes it important for us, as
MA’s, to be fully aware of what TQM is and
how its arrival can change what we do – if this
is for the good, we embrace; if this is for the
bad, we make our voice heard so that we are
properly considered)
 Author: Chris O'Riordan ACA MBA,
Lecturer in Accounting, Waterford Institute of
Technology . (ACCA 2010 ADOPTED