QUALITY AND ENVIRONMENTAL COST MANAGEMENT CHAPTER 14 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER 14 OBJECTIVES Define quality, describe the four types of quality costs, and discuss the approaches used for quality cost measurement Prepare a quality cost report, and explain its use Explain why quality cost information is needed and how it is used Describe and prepare three different types of quality performance reports © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER 14 OBJECTIVES Discuss how environmental costs can be measured, reported, and reduced Show how environmental costs can be assigned to products and processes © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY • A quality product or service is one that meets or exceeds customer expectations • Quality of conformance measure of how a product meets its specifications • Defective product is one that does not conform to specifications • Zero defects means all products conform to specifications • Robustness means exact conformance to the target value LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY • Costs of quality are the costs that exist because poor quality may or does exist • Control activities are performed by an organization to prevent or detect poor quality • Failure activities are performed by an organization or its customers in response to poor quality • Failure costs are the costs incurred by an organization because failure activities are performed LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY • The definitions of quality-related activities imply four categories of quality costs Prevention costs Appraisal costs Internal failure costs External failure costs LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY • Prevention costs: incurred to prevent poor quality • Appraisal costs: incurred to determine whether products and services are conforming to their requirements or customer needs LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY • Internal failure costs: incurred because products and services not conform to specifications or customer needs • External failure costs: incurred because products and services fail to conform to requirements or satisfy customer needs after being delivered to customers LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 14.1—EXAMPLES OF QUALITY COSTS BY CATEGORY LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use COSTS OF QUALITY Quality Cost Measurement •Observable quality costs: available from an organization’s accounting records •Hidden quality costs: opportunity costs resulting from poor quality • Three methods of estimating hidden quality costs The multiplier method The market research method The taguchi quality loss function LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CONTROLLING QUALITY COSTS Incentives for Quality Improvement • Nonmonetary incentives • Monetary incentives LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CONTROLLING QUALITY COSTS Nonmonetary Incentives •Participation helps employees internalize quality improvement goals as their own •One approach is the use of error cause identification forms • Program in which employees describe problems that interfere with their ability to the job right the first time LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CONTROLLING QUALITY COSTS Monetary Incentives •Gainsharing provides cash incentives for a company’s entire workforce that are keyed to quality or productivity gains •Gainsharing provides an incentive by offering a bonus to the employees equal to a percentage of the cost savings LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use DEFINING, MEASURING, AND CONTROLLING ENVIRONMENTAL COSTS The Ecoefficiency Paradigm •Ecoefficiency: ability to produce competitively priced goods and services that satisfy customer needs while simultaneously reducing negative environmental impacts, resource consumption, and costs •Sustainable development: development that meets the needs of the present without compromising the ability of future generations to meet their own needs LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 14.9—ECOEFFICIENCY RELATIONSHIPS LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use DEFINING, MEASURING, AND CONTROLLING ENVIRONMENTAL COSTS Environmental Costs •Costs that are incurred because poor environmental quality exists or may exist •Four categories Environmental prevention costs Environmental detection costs Environmental internal failure costs Environmental external failure costs LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 14.10—CLASSIFICATION OF ENVIRONMENTAL COSTS BY ACTIVITY TYPE LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use DEFINING, MEASURING, AND CONTROLLING ENVIRONMENTAL COSTS Environmental Cost Report •Reporting environmental •Costs by category reveals two important outcomes • The impact of environmental costs on firm profitability • The relative amounts expended in each category LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 14.11—RELATIVE DISTRIBUTION: ENVIRONMENTAL COSTS LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use DEFINING, MEASURING, AND CONTROLLING ENVIRONMENTAL COSTS Environmental Cost Reduction •Investing more in prevention and detection activities reduces environmental failure costs •Zero damage is the lowest cost point for environmental costs LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use DEFINING, MEASURING, AND CONTROLLING ENVIRONMENTAL COSTS An Environmental Financial Report •Ecoefficiency suggests a possible modification to environmental cost reporting • Specifically, in addition to reporting environmental costs, report environmental benefits • Additional revenues • Current savings • Cost avoidance (ongoing savings) LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 14.12—ENVIRONMENTAL FINANCIAL STATEMENT LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ENVIRONMENTAL COSTING Environmental Product Costs •Full environmental costing: assignment of all environmental costs, both private and societal, to products •Full private costing: assignment of only private costs to individual products LO-6 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ENVIRONMENTAL COSTING Activity-Based Environmental Cost Assignments •Activity-based costing facilitates environmental costing •Each environmental activity is assigned costs, activity rates are computed, and the rates are then used to assign environmental costs to products based on usage of the activity •By assigning environmental cost to products, management can classify products according to their degree of “dirtiness” LO-6 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use END OF CHAPTER 14 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... classroom use COSTS OF QUALITY • The definitions of quality-related activities imply four categories of quality costs Prevention costs Appraisal costs Internal failure costs External failure costs LO-1... use COSTS OF QUALITY • The multiplier method: assumes that the total failure cost is simply some multiple of measured failure costs Total external failure cost = k(Measured external failure costs)... classroom use REPORTING QUALITY COSTS Role of Activity-Based Cost Management •Activity-based costing (ABC) can be used to calculate the quality costs per unit of a firm’s products •Classifies