Chapter 17 – The Management & Control of Quality
Teaching Notes for Readings
Reading 17-1: “GE Takes Six Sigma Beyond the Bottom Line” by G. T. Lucier and S. Seshadri,
Strategic Finance (May 2001), pp. 40-46.
This article reports the success of GE Medical Systems Inc.’s Six Sigma effort. It describes the training
programs for employees in statistical process control and s Services and information offered by the Web
site of the company to support the quality improvement efforts of more than 300,000 employees
worldwide.
Discussion Questions:
1. What is a Six Sigma approach?
Sigma is the Greek letter used in statistics to denote standard deviation. Six Sigma means that the
2. Describe the processes that GE uses to implement its Six Sigma program.
GE uses acronym DMAIC to describe its Six Sigma approach:
Define – Define problems related to the business or critical factors to customer satisfaction.
3. What are black belts? What roles black belts play in GE’s Six Sigma program?
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Reading 17-2: R. C. Kettering, “Accounting for Quality with Nonfinancial Measures: A Simple
No-Cost Program for the Small Company,” Management Accounting Quarterly (Spring 2001),
pp. 14-19.
The author of this article argues that, to improve product/service quality, even small companies can
develop and use nonfinancial, low-cost data to improve performance and customer satisfaction.
Discussion Questions:
1. In terms of a Cost of Quality (COQ) framework for managing and controlling quality costs,
distinguish between cost of conformance and cost of non-conformance. Into what subdivisions
can each of these two broad categories of quality-related costs be made? What is the definition of
each of the four categories of quality cost in a typical COQ report?
Cost of conformance = Prevention Costs + Appraisal Costs; Cost of Nonconformace = Failure Costs
(Internal Failure Costs + External Failure Costs). As the authors of this article point out, the former
costs are associated with the achievement of quality, while the latter costs are associated with
nonachievement of quality of the organization’s output (service or product). Alternatively, one can
view conformance costs as those costs incurred to make sure the product or service is right the first
time; nonconformance costs, on the other hand, are incurred to correct a problem or quality defect.
Breakdown of conformance costs:
Prevention costs–quality costs incurred to prevent poor quality (i.e., defects) from being
2. Provide an overview of the three-step approach that the author of this paper recommends as a
“no-cost” approach that can be used by smaller (i.e., more resource-constrained) organizations to
monitor and control quality.
The authors maintain the financial control of quality, via the Cost of Quality (COQ) reporting
framework outline above in (1), may be more appropriate for larger, more resource-rich organizations.
Thus, the author suggests that smaller, more resource-constrained may be able to control quality costs
by focusing on nonfinancial performance indicators.
In this regard, the author proposes a three-step approach:
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3. Provide at least two examples of non-financial quality indicators for each of the four categories of
quality-related costs typically included in a COQ report.
Examples are provided by the author in Table 2 in the article.
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Reading 17-3: Marc Epstein, “Implementing Corporate Sustainability: Measuring and Managing
Social and Environmental Impacts,” Strategic Finance (January 2008), pp. 25-31.
This article is an excerpt of the award-winning book by the author: Making Sustainability Work: Best
Practices in Managing and Measuring Corporate Social, Environmental and Economic Impacts, Berrett-
Koehler Publishers (2008). It is also one of a series of four articles, based on the book, published in
Strategic Finance.
Discussion Questions:
1. What is the primary business issue and the primary accounting issue addressed by the author of
this article?
The primary business issue is the role of social and environmental responsibility in business—in short,
sustainability. From an accounting standpoint, the question is: how can management accounting and
2. Provide an overview of the “Corporate Sustainability Model” developed by the author of this
article (see Figure 1).
Figure 1 (Corporate Sustainability Model) describes the drivers of corporate sustainability performance,
actions that managers can take to affect that performance, and consequences of those actions—both on
corporate social and financial performance. Ultimately, the use of such a monitoring and control system
3. How is the Corporate Sustainability Model similar to and different from Exhibits 17.1 and 17.2?
Text Exhibit 17.1 provides a general framework that can be used to explain the business rationale for
quality-related spending and investment. It includes both financial and nonfinancial factors associated
with such spending. In a sense, Exhibit 17.1 lays out the business case for such spending. Text Exhibit
17.2 provides one possible comprehensive framework for managing and controlling quality. That is, it
represents management accounting’s response to the need to support the quality-related initiatives of
4. What is the importance of the examples provided in Table 1 of the article?
As indicated in the article, Table 1 provides a small sample of measures for the inputs, processes,
outputs, and outcomes in the Corporate Sustainability Model. Companies will select a small number of
measures and customize them to meet their corporate strategies. The chosen measures should be
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Chapter 17 – The Management & Control of Quality
indicators—both internal and external—that, together, constitute a comprehensive management
accounting and control system regarding quality.
Various tools and techniques are available to measure the different aspects of sustainability
performance. For example, customer surveys are powerful tools that help companies better understand
Although measurement may be imprecise, it certainly is relevant. Social and environmental impacts
should be included in ROI calculations for more effective managerial decision-making at all
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Reading 17-4: “Making the Cost of Quality Practical” by Steve Ball, Strategic Finance (July
2006), pp. 34-41.
The author of this article discusses conditions under which a Cost of Quality (COQ) program may be
warranted, as well as how to establish a COQ system in practice. Four specific examples of using a COQ
program to improve managerial decision-making are presented in the article.
Discussion Questions:
1. What, in your opinion, is the overall purpose of (or message in) this article?
This article addresses the following issue: how best to manage and control spending on quality, that is,
resources devoted to quality-related initiatives. Yes, companies want to improve quality. From an
benefits of such a tool are captured by the eight points listed at the beginning of the article.
2. Provide a succinct summary of the author’s conceptualization of quality and quality costs? (Hint:
Refer to Tables 1 and 2.)
Table one depicts total quality costs as the sum of conformance (“proactive”) costs + nonconformance
(“reactive”) costs. The former category includes both prevention costs as well as appraisal/detection
costs, while the latter category includes failure costs, both internal and external.
sourcing decision.
3. What is the difference between “fully loaded” and “variable” costs? According to the author, why
is this distinction important?
This distinction is raised by the author in conjunction with example #4—Materials Purge. A materials
purge generates costs throughout the value chain. A mature COQ system will provide data regarding the
cost of purges, thereby enabling management to determine an appropriate level of spending on
4. What is the primary value of the information contained in Table 6 of this article?
The example in Table 6 is important because it represents one possible senior-level report that the
accounting system can prepare. Note that behind Table 6 there probably would be various supporting
schedules, data, and tables. However, top management is probably better served with summary results,
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Reading 17-5: Anton Van Der Werwe and Jeffrey Thompson, “The Lowdown on Lean
Accounting: Should Management Accountants Get on the Bandwagon—or Not?” Strategic
Finance (February 2007), pp. 26-33.
The authors of this article called for reasoned debate regarding the role of “lean accounting” in
accounting practice. As such, they raise some interesting questions for both proponents and opponents of
“lean accounting,” all in an attempt to define a more appropriate role for “leaning accounting.”
Discussion Questions:
1. What two critical questions are raised by the authors as regards the role of lean accounting (LA)
in organizations today?
The author’s address the following two questions regarding lean accounting:
2. Which specific assertions of lean accounting are examined by the authors of this article?
When new systems, including suggested refinements to management accounting systems, are
introduced, it is common practice to focus on limitations or problems associated with existing systems.
This is the case, too, with proponents of lean accounting, who have raised a number of objections to
traditional/existing management accounting systems. The authors of this article address the following
assertions of the proponents of lean accounting:
3. What conclusions do the authors draw in response to the two questions raised at the outset of this
article?
In the words of the authors:
a) At best, except for highly simplified contexts, lean accounting in full deployment is probably
premature. It is not that the authors reject a potential role of lean accounting. Rather, their argument
b) The authors assert that the answer to the second question, “Does lean accounting support decision-
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Reading 17-6: Jan P. Brosnahan, “Unleash the Power of Lean Accounting,” Journal of
Accountancy (July 2008), pp. 60-66. (Available at:
http://www.journalofaccountancy.com/Issues/2008/Jul/UnleashthePowerofLeanAccounting.htm)
The author of this article is divisional controller at Watlow Electric Manufacturing Company
(www.watlow.com), which recently introduced a lean accounting system to support its move to “lean.”
This article provides a perspective regarding the motivation behind these moves and the associated
benefits of the changes implemented at Watlow Electric.
Discussion Questions:
1. How does the author of this article define the term “lean accounting” and what does she indicate
as some of the primary methods of “lean accounting”?
One broad interpretation of “lean accounting” would be the set of internal accounting practices and
systems designed to support an organization’s move to “lean manufacturing.” As stated in the article,
“lean accounting concepts are designed to better reflect the financial performance of a company that has
implemented lean manufacturing processes.”
The primary elements or methods of “lean accounting” are as follows:
In a sense (and a good point to make to accounting students), lean accounting is said to embrace the
2. In what sense does the author see a deficiency in terms of using traditional accounting systems
when an organization adopts a lean manufacturing strategy?
Proponents of lean accounting maintain that traditional management accounting systems at a minimum
do not capture the process improvements associated with a move to lean manufacturing or at worst
contradict improvements made by this move. (Some of these effects, though real, are short-term in
nature. For a fuller discussion of this point, see: Robin Cooper and Brian Maskell, “How to Manage
Through Worse-Before-Better,” Sloan Management Review (Summer 2008), pp. 58-65.)
revise existing internal accounting systems to support the changed initiatives.
3. What is meant by the term “value stream management” (VSM) and how, specifically, was this
instituted at Watlow Electric?
As noted above, one of the tenets of lean accounting is the construction—for reporting and decision-
making purposes—of value streams. A value stream can be defined as all the activities required to bring
a product or service from conception through to the customer, including related information processing,
logistics, and the collection of money. This concept is key because under lean accounting, like-kind
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The basic steps used by Watlow to implement VSM are given in the bullet points of the article. See
Exhibit 3 for a timeline regarding the implementation of VSM at Watlow Electric.
4. What implementation challenges did Watlow experience as it moved from a traditional
accounting and control system to VSM?
As with any fundamental change in business or accounting practice, behavioral considerations are key
to successful implementations. This was the case at Watlow Electric. The author identifies two specific
behavioral issues that the company had to address as part of its implementation effort:
Employee anxiety associated with role ambiguity—a problem that was particularly acute for
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