Cost management accounting and control 6e by hansen mowen guan chapter 14

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Quality and Environmental Cost Management COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license Study Objectives Define quality, describe the four types of quality costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report Explain why quality cost information is needed and how it is used Describe and prepare three different types of quality performance reports Explain how environmental costs can be measured and reduced Costs of Quality • Quality-linked activities – Activities performed because poor quality may or does exist – Control activities • performed by an organization • to prevent or detect poor quality – Failure activities • Performed by an organization or its customers • In response to poor quality Costs of Quality • Categories of quality costs – Prevention costs: incurred to prevent poor quality in product or services from being produced – Appraisal costs: Incurred to determine whether products and services are conforming • • Product acceptance: sample finished goods Process acceptance: sample goods while in process – Internal failure costs: incurred because products or services not conform; discovered prior to delivery – External failure costs: incurred because products or services not conform; discovered after delivery Costs of Quality Costs of Quality Costs of Quality • Quality cost – Observable • Available from the accounting records – Hidden • Opportunity costs resulting from poor quality • Estimating hidden quality costs – The multiplier method – The market research method Costs of Quality Multiplier Method Assumes that the total failure cost is simply some multiple of measured failure costs: ( Total external = k Measured external failure cost failure cost ) where k is the multiplier effect If k = 4, and the measured external failure costs are $3 million, then the actual external failure costs are estimated to be $12 million Costs of Quality Market Research Method Uses formal market research methods to assess the effect of poor quality on sales and market share Market research results can be used to project future profit losses attributable to poor quality Customer surveys and interviews with members of a company’s sales force can provide significant insights into the magnitude of a company’s hidden costs Costs of Quality a b Actual sales of $5,000,000 $1,000,000 ÷ $5,000,000 = 20% 10 Controlling Quality Costs 26 Controlling Quality Costs 27 Controlling Quality Costs 28 Controlling Quality Costs 29 Controlling Quality Costs 30 Defining, Measuring, and Controlling Environmental Costs • Environmental costs: costs that are incurred because poor environmental quality exists or may exist • Damage – Direct degradation of the environment – Indirect degradation (unnecessary usage) • Categories – – – – prevention costs detection costs internal failure costs external failure costs 31 Defining, Measuring, and Controlling Environmental Costs 32 Defining, Measuring, and Controlling Environmental Costs 33 Defining, Measuring, and Controlling Environmental Costs 34 Defining, Measuring, and Controlling Environmental Costs continued 35 Defining, Measuring, and Controlling Environmental Costs Note: “S” = societal costs 36 Defining, Measuring, and Controlling Environmental Costs 37 Defining, Measuring, and Controlling Environmental Costs 38 Defining, Measuring, and Controlling Environmental Costs 39 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter 14 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license 40 ... long-range standard or goal 19 Controlling Quality Costs 20 Controlling Quality Costs 21 Controlling Quality Costs 22 Controlling Quality Costs 23 Controlling Quality Costs 24 Controlling Quality Costs... Quality Costs 25 Controlling Quality Costs 26 Controlling Quality Costs 27 Controlling Quality Costs 28 Controlling Quality Costs 29 Controlling Quality Costs 30 Defining, Measuring, and Controlling... quality costs, discuss the approaches used for quality cost measurement, and prepare a quality cost report Explain why quality cost information is needed and how it is used Describe and prepare