Quality costing

Quality costing

Introduction

Quality costing refers to the means through which total costs deficiencies and efforts are quantified. Quality costing in its processing, provides meaningful advice on the management on the setting and developing of quality systems and the utilization of emerging data (Adam, 56).  An effective quality costing recognizes the need to identify, define, collect and analyze quality costs.  Some scholars define quality costing as the total price you pay for lack of creating a quality service or product.

Quality costing has been in existence for quite some time. Nevertheless, the cost of quality has become influential and more profound in the twenty first century (Dale & Wan, 105).  Customers and the process improvement have, in the recent past, demanded the need for value, satisfaction and and quality of the products and services (Ling &David, 123). Many organizations facilitate the promotion of costs of quality as the core customer value, hence regard it as a crucial factor of success for customer satisfaction, financial performance and process improvement.

Theories and models of quality costing

There are several  models that examine and explain the existence, importance and the link between costing quality, and customer expectations and improve benefits associated with it.  These improvement  benefits include financial performance and process improvement.  These  altogether facilitates the reduction of costs and increment of benefits therefore leading to improved quality.  This in turn implies that an efficient cost of quality need to be considered  as an essential and crucial element of initiatives on quality.  This is a critical issue to the company’s management since it defines the future of the company (Jonas & Henrik, 45).

The Prevention-Appraisal-Failure (P-A-F) Model

This model tries to explain the quality costing by believing that there exists an optimum economic quality at a level where the benefits accrued from quality improvement exceed the cost of sustaining a higher quality. The model argues that the costs of production associated with quality include appraisal, prevention and failure costs.  Prevention costs of quality refer to the costs incurred in reduction of failures and defects in the production process while an appraisal is the costs of measuring quality achieved.   This implies that the customer satisfaction, process improvement and financial performance of a company heavily depends on the level of economic quality.

However, this model has been challenged on many occasions, since the opponents believe that level of economic quality can only exist in ideal and not in reality.  The main aim of this model is to measurably determine the quality level that reduces the costs of quality.  In addition, investment in appraisal and prevention activities result in reduction of failure costs therefore, improving financial performance and processes.  This model further suggests that the quality of a product should conform with its requirements so that there is no chances of failure hence improving customer satisfaction.  This model is crucial in the deciding and implementation of quality strategy since it gives the management a balance point to work with.

The model gives the management an informed decision on the correct channels to follow in the appraisal and prevention activities.  The management will use the model in making sure that a point is reached where the increase in costs of appraisal and prevention coupled with the resulting decrease in costs of failure lowers the total costs of quality. This ensures that quality costing is reduced and therefore the quality of products and services is not compromised.

Opportunity and intangible cost model

This model has come under focus in the recent past.  This refers to the costs that exist only in the estimation.  This can include costs such as the costs of not having the profits from unsatisfied or lost customers and minimal revenue earned due to inadequate conform to the quality standards.  This leads to opportunities being lost that could have otherwise increased the financial performance of the company (Johnston,  & Clark, 12).  These opportunities may arise in the cases where the company underutilizes its capacity, has poor service delivery and inadequate operation of materials.  This therefore, results in the total costs of lost revenue and foregone profits.

This model of quality costing also suggests that the earlier classical model, PAF needs to be more broad and accommodate other costs that it neglects.  In this case the satisfaction of the customer as well as process improvement is ensured so that the costs are reduced considerably.  Reduced costs too, leads to better financial performance since there is value in the costs incurred.  This implies that costs that will be accrued are necessary for the processes of production.  Furthermore, the proponent scholars of this model of quality costing argue that effective quality costing need to be divided into three broad dimensions that include  those costs emanating from conformance, opportunity lost and those that do not conform with the set standards.

This model is so significant to quality costing to the extend that Juran, in his model recognizes the importance of these factors in total costs incurred.  He proposes that it is only by this model that a company is able to effectively measure the costs of quality and perform efficiently.  This can be done through a rough estimation of these costs, and especially the cost of lost clients.  The other models do not give an explanation to the effect in regard to these intangible costs and opportunities foregone.  In addition, the model goes further to elaborate how the lost opportunity functions are used in the costing to measure the hidden costs of quality.  Customer satisfaction could easily be determined through this model as it is broad and explains how quality can be measured (Dale & van, 200).  Improvement in processes and financial performance is ensured significantly since the intangible costs give an insight.

Process cost model

This quality costing was put forward by theorist Ross.  The model elaborately explains the costs of quality effect on customer satisfaction and general performance of the financial situations of the company.  The model suggests that more focus should be placed on the processes of production especially in the manufacturing industry rather than the usual emphasis on the products and services.

Ross argues that the costs incurred in making a product or service lies in the systems and processes rather than the product itself (Juran, 23).  For instance, the in the production process, one could easily infer the total costs incurred in either conforming or not conforming to the set standards of quality.  This implies that the total actual costs incurred in o adhering to failure to specified process or conformance can be easily found and data analyzed by the accounting department.  Another factor that made Ross and other proponents of this theory is the idea that the model allows measuring of costs at any level of the processes (Evans &Lindsay, 23).

Accordingly, one could determine the limitations of strong conformance and non-conformance, therefore adopting a new design in the process (Roden & Dale, 180).  On the same note, the model is preferred in determination of total quality costing since it presents an integrated and effective approach to quality costing than other models.  The other quality costing models rarely provides the analysts with appropriate data related to quality.  The process model is further strengthened by the fact that it presents its relevance elaborately thereby facilitating the fitting of the existing systems of accounting.  The process model, in application is wider and elaborate hence facilitating analysis and collection quality cost functions. Nevertheless, the application of this model remains under-utilized all over the world (Arnold, 56).

Process improvement

Quality costing influence on the process improvement still remains a debatable topic (Isabel & Elena, 176).  In order for a process to effectively perform in the company and continuously improve, there is a need to have high standards of quality that are sustained.  This can only be realized through quality costing.  This is because quality costing ensures that the total costs of production are reduced and therefore the capital that could have otherwise lost is used to improve the process.  Quality costing in a company demands that the process are continuously improved (Barrie, 23).  This is a mutual relationship that exists between quality costing and process improvement.  This is due to the fact that quality can only be measured and ensured if the process are improved continuously to match the demands of the changing world.  An improved process relies heavily on quality costing as the main dimension and Pilar.  This in turn makes sure that the quality of products as well as services delivered is of high standards.  Furthermore, quality costing links with process improvement in such a way that it embraces a wider scope of measurement and facilitates the performance of the entire process (Aloy & Niels, 100).

It can also improve processes through quality training and engineering. Quality training involves educating employees on the standards that are met during manufacturing activities and training them on how to achieve these standards (Jack, 12). Through improving the skills and knowledge of the employee they are able to perform their duties more efficiently and effectively (Douglas, 20). Thus, enhancing production process. This can only be realized through quality costing.   This is conclusively suggested in the process model of quality control since it is only the process that can be able to elaborately offer an integrated approach in application. Contrary to this, increased emphasis on the quality costing can also lead to the neglecting of the processes of production thereby compromising the process leading to its decline.

Financial performance

Quality costing affects and influences financial performance of any given organization or company directly.  Poor quality costing will result in losses to the company, whereas on the other hand efficient quality costing ensures that companies perform well financially (Roden &Dale, 380).  Quality costing in extension facilitates quality costing training in organization therefore enabling the employees to understand the importance of performance measurement (Halim & Ayse, 20).  Quality costing using the models can be able to identify and thus utilize the opportunities available for financial improvement.

In addition, quality costing provides the company with feedback that facilitates the driving efforts and areas of priority for general improvement.  The fact that quality costing allows tracking progress systems implies that it sustains the current financial improvement while declining threats to financial improvement (Jan & Tony, 21).

On the other hand if the quality costing is not checked it may lead to poor financial performance (Lynette, 23).  This is because more emphasis could be directed to quality of costing and ultimately forgetting the product needs and the preferences of influential customers.  Therefore, it is only an efficient and effective quality costing that can improve financial performance.

Customer satisfaction

Since quality costing is more than just measuring the costing incurred in the process of production, it provides a balanced measure through which customer satisfaction is realized.  Customers are always interested in the maintenance and creation of quality products and services, being directly influenced by quality costing.  It is worthy noting that the cost of quality is crucial to customers as it acts as the communication tool of the value they receive from the products and services produced. As a communication tool it provides the customer with visibility and a platform for measuring standards of the products and services so that their requirements are effectively met (Odysseas, 23).  This in turn ensures that customer satisfaction is realized.

In conclusion, a better understanding of quality costing is core to the improvement of processes, customer satisfaction and improved financial performance. This is because a deeper understanding of the dimensions of quality costing leads to reduced total costs incurred by a company in the production process.

 

 

 

References

Adam, S. (2012). The Effects of Information Technology Integration on Manufacturing Financial Performance: The Role of Cost Control Systems. Emerald Group Publishing Limited, 3 (4) 183-206.

Aloy, S., & Niels, Z. (2012). Board Transparency, CEO Monitoring and Firms’ Financial Performance, in J. Jay Choi, Heibatollah Sami (ed.). Transparency and Governance in a Global World, 13 (3), 99-125.

Arnold, L. (1994). The Manager’s Guide to ISO 9000, New York: Free Press.

Barrie, G.,  & James, J.  (1999). Quality Costing. United Kingdom: Gower Publishing, Ltd.

Crosby, B. (1979). Quality Is Free, New York. New York: McGraw-Hill.

Dale ,B., & van, J. (2010). Managing Quality, 6th edition. London: Blackwell Publishing.

Dale, B., & Wan, M. (2002). Setting up a quality costing system: An evaluation of the key issues. Business Process Management Journal, 8 (2), 104 – 116.

Douglas, W. (2013). Principles of Quality Costs: Financial Measures for Strategic. Milwaukee. Asq Press.

Evans, R., &Lindsay, M. (2008). The Management and Control of Quality. Thomson South-Western Publisher.

Halim, K., & Ayse, T. (2006). The effect of manufacturing strategies on financial performance. Measuring Business Excellence, Vol. 10  (1), 14 – 26.

Isabel, M., & Elena, R. (2006). Learning capability and business performance: a non-financial and financial assessment. Learning Organization,  13  (2), 166 – 185.

Jan, M., & Tony, S. (1994). Quality Costing – The Money in Mistakes. The TQM Magazine,  6 (3), 20 – 22.

Jack, C. (1999). Principles of Quality Costs: Principles, Implementation and Use. Milwaukee: Asq Press.

Johnston, R., & Clark, G. (2008). Service Operations Management. 3rd Ed. Essex: Pearson Education Ltd.

Jonas, H., & Henrik, E. (2002) .The impact of TQM on financial performance. Measuring Business Excellence, . 6  (4), 44 – 54.

Juran, M. (1962). Quality Control Handbook (2 Ed.) New York: McGraw-Hill.

Ling, X., &David, A. (2000). The role of technology and quality on hospital financial perfo,rmance: An exploratory analysis. International Journal of Service Industry Management,  11  (3), 202 – 224.

Lynette, H. (1994). Costing for Quality –: A Case Study. International Journal of Health Care Quality Assurance,  7 (2), 10 – 13.

Odysseas, P. (2010). The impact of firm characteristics on ABC systems: a Greek-based empirical analysis. Studies in Managerial and Financial Accounting, 20 (3). 501-527.

Roden, S., & Dale, B. (2000). Understanding the language of quality costing”, The TQM Magazine, 12 (3), 179 – 185.

Roden, S., &Dale, B. (2001). Quality costing in a small engineering company: issues and difficulties”, The TQM Magazine, 13  (6), 388 – 400.

 

Latest Assignments