A quality cost reporting system is essential if an organization is serious about improving and controlling quality costs. The first and simplest step in creating such a systemis assessing current actual quality costs. A detailed listing of actual quality costs by category can provide two important insights. First, it reveals the magnitude of the quality costs in each category, allowing managers to assess their financial impact. Second, it shows the distribution of quality costs by category, allowing managers to assess the relative mportance of each category.
Quality Cost Reports
The financial significance of quality costs can be assessed more easily by expressing these costs as a percentage of actual sales. Exhibit 14-5, for example, reports the quality costs of Goates Company for fiscal 2007. According to the report, quality costs represent 20 percent of sales. Given the rule of thumb that quality costs should be no more than 2 to 4 percent, Goates has ample opportunity to improve profits by decreasing quality costs. Understand, however, that reduction in costs should come through improvement of quality. Reduction of quality costs without any effort to improve quality could prove to be a disastrous strategy.
Additional insight concerning the relative distribution of quality costs can be realized by constructing charts that show the relative amount of costs in each category. Exhibit 14-6 provides a bar graph and pie chart that show each category’s percentage contribution to total quality costs. The graphs reveal that failure costs are approximately 82 percent of the total quality costs, suggesting that Goates has ample opportunity to improve quality and lower total quality costs. But by how much? What is the optimal relative distribution of quality costs?
Distribution of Quality Costs:
The Acceptable Quality View
One view of optimal quality cost distribution is the acceptable quality view. Although this view is no longer widely accepted, it serves as a useful point of reference for understanding the current views on how quality costs should be distributed. According to the acceptable quality view, there is an optimal tradeoff between failure 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 increasing its efforts to prevent or detect nonconforming units. Eventually, a point is reached at which any additional increase in this effort costs more than the corresponding reduction in failure costs. This point represents the minimum level of total quality costs. It is the optimal balance between control costs and failure costs
Quality Cost Reports
The financial significance of quality costs can be assessed more easily by expressing these costs as a percentage of actual sales. Exhibit 14-5, for example, reports the quality costs of Goates Company for fiscal 2007. According to the report, quality costs represent 20 percent of sales. Given the rule of thumb that quality costs should be no more than 2 to 4 percent, Goates has ample opportunity to improve profits by decreasing quality costs. Understand, however, that reduction in costs should come through improvement of quality. Reduction of quality costs without any effort to improve quality could prove to be a disastrous strategy.
Additional insight concerning the relative distribution of quality costs can be realized by constructing charts that show the relative amount of costs in each category. Exhibit 14-6 provides a bar graph and pie chart that show each category’s percentage contribution to total quality costs. The graphs reveal that failure costs are approximately 82 percent of the total quality costs, suggesting that Goates has ample opportunity to improve quality and lower total quality costs. But by how much? What is the optimal relative distribution of quality costs?
Distribution of Quality Costs:
The Acceptable Quality View
One view of optimal quality cost distribution is the acceptable quality view. Although this view is no longer widely accepted, it serves as a useful point of reference for understanding the current views on how quality costs should be distributed. According to the acceptable quality view, there is an optimal tradeoff between failure 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 increasing its efforts to prevent or detect nonconforming units. Eventually, a point is reached at which any additional increase in this effort costs more than the corresponding reduction in failure costs. This point represents the minimum level of total quality costs. It is the optimal balance between control costs and failure costs
and defines what is known as the acceptable quality level (AQL). This theoretical relationship is illustrated in Exhibit 14-7 on the following page. The graph reveals that total quality costs decrease as quality improves up to a point. After that, no further improvement is possible. Thus, AQL identifies an optimal level of defective units. Note that this level does not correspond to that of zero defects
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