Cost Control Chapter 14

Front 1

Quality of Conformance

Back 1

is the degree to which the actual product that is
manufactured or the actual service that rendered meets or exceeds the design specifications and is free of defects or problems that might affect appearance or performance.

Front 2

A defective product

Back 2

is one that does not conform to specifications.

Front 3

Zero defects

Back 3

all products conform to specifications.

Front 4

Robustness

Back 4

means exact conformance to the target value (no tolerance allowed).

Front 5

quality costs or cost of quality

Back 5

the costs that come from Preventing, detecting, and dealing with defects.

Front 6

There are four (4) groups of quality costs. (examples are in exhibit 14-1 on p.499)

Back 6

1. prevention costs
2. appraisal costs
3. internal failure costs
4. external failure costs

Front 7

1. prevention costs

Back 7

relate to activities that reduce the number of defects in products or services.

Front 8

quality circles

Back 8

small groups of employees that meet on a regular basis to discuss ways to Improve the quality of the product or service.

Front 9

statistical process control (SPC)

Back 9

workers use charts to monitor the quality of the parts or components that pass through their workstations. The chart enables the worker to determine if the process in or out of control.

Front 10

2. appraisal costs

Back 10

costs incurred to identify defective products before the product is shipped to the customer (often referred to as inspection costs).

Front 11

3. internal failure costs

Back 11

result from identification of defects during the appraisal process. The internal failure costs include reworking defective units, scrap, rejected products, and downtime caused by quality problems.

Front 12

4. external failure costs

Back 12

result from a defective product being delivered to a customer. External failure costs also include hidden costs that are difficult to quantify such as lost sales due to previous poor quality.

Front 13

There are three ways to attempt to quantify hidden costs.

Back 13

1. The Multiplier Method
2. The Market Research Method
3. The Taguchi Quality Loss Function

Front 14

The prevention costs and the appraisal costs are examples of what?

Back 14

control activities

Hint 14

are incurred in an effort to keep poor quality from occurring

Front 15

The internal failure costs and external failure costs are examples of what?

Back 15

failure activities

Hint 15

and are incurred because poor quality of conformance has occurred.

Front 16

Quality Cost Reports

Back 16

provide and estimate of the financial consequences of the company’s current level of defects. It details the prevention costs, appraisal costs, and the internal and external failure costs that arise from the current level of defective products and services.

Front 17

What are the Benefits of Quality Cost Reports?

Back 17

1. Makes managers aware of the financial significance of defects

2. Helps managers identify the relative importance of the quality problems
faced by the firm

3. Identifies the area quality costs are being incurred, i.e. prevention, appraisal, internal or external failure

Front 18

acceptable quality level (AQL).

Back 18

An outdated view of quality costs. AQL assumes there is an optimal tradeoff between failure costs and control costs. As control costs increase, failure costs should decrease. As long as the decrease in failure costs is greater than the corresponding increase in control costs, a company should continue to increase control costs. The point where additional control costs no longer create a greater decrease in failure costs, is called the AQL, the optimal balance between control costs and failure costs. Notice, this level does not correspond to that of zero defects.

Front 19

zero-defects model which is also known as the Total Quality Approach

Back 19

The current view of quality costs.The zero-defects model claims that it is cost-beneficial to reduce nonconforming units to zero. The zero-defect model assumes a robust view. A robust view holds that a loss is experienced from producing products that vary from a target value. Variation from the ideal is costly, and specification limits serve no useful purpose.

Hint 19

Firms that increase their prevention and appraisal costs and reduce their failure costs, discover that they can then cut back on their prevention and appraisal costs. What initially appears to be a trade-off turns out to be a permanent reduction in costs for all quality cost categories.

Front 20

The ISO 9000 Standards (ISO= International Standards Organization)

Back 20

Standards are set to assure the level of quality in products sold to companies in Europe. These standards do not apply to the production of a particular product or service. Instead, they apply to the way in which a company ensures quality, for example, by testing products, training employees, keeping records, and fixing defects.

Front 21

ISO 9000 provides a way for companies to certify to their customers that:

Back 21

1. They have a quality control system in use, and the system clearly defines an expected level of quality.

2. The system is fully operational and is backed up with detailed documentation of quality control procedures.

3. The intended level of quality is being achieved on a sustained, consistent basis.

Front 22

Productivity

Back 22

concerned with producing out put efficiently

Front 23

Total Productive Efficiency

Back 23

the point where 2 conditions are satisfied:

Hint 23

1. For any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output
This is called Technical Efficiency = it is driven by technical relationships, i.e. eliminate non-value added activity and perform value-added activity efficiently.
There are 3 ways to achieve an improvement in technical efficiency (exhibit 15-1, p.535)
1.Same output, fewer inputs
2.More outputs, same inputs
3.More output, fewer inputs
2. Given the mixes that satisfy the 1st condition, the least costly mix is chosen
This is called Allocative Efficiency = it is driven by relative input price relationships (exhibit 15-2, p536)
Choosing the right combination of inputs can be as critical as choosing the right quantity of inputs

Front 24

Partial Productivity Measurement

Back 24

measuring productivity for one input at a time.

Front 25

Productivity ratio

Back 25

=Output/Input

Front 26

Operational productivity measure

Back 26

both output and input are measured in physical quantities

Front 27

Financial productivity measure

Back 27

output or input is expressed in $

Front 28

Total Productivity Measurement

Back 28

measuring productivity of all inputs at once – in practice, you may look at only those that indicate organizational success.

Front 29

Profile Productivity Measurement

Back 29

looks at Partial Operational Measurements over time. The ratio does not reveal the value of the change

Front 30

Profit-Linked Productivity Measurement

Back 30

Measuring the amount of profit change linked to productivity change.

Front 31

Profit-Linked Rule:

Back 31

For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change and compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes.