Chapter 17 – The Management and Control of Quality
Chapter 17
The Management and Control of Quality
Learning Objectives
1. Discuss the strategic importance of quality
2. Define accounting’s role in the management and control of quality
3. Develop a comprehensive framework for the management and control of quality
4. Understand two approaches for setting performance expectations (Six Sigma, absolute vs.
goalpost specifications, and Taguchi loss functions)
5. Prepare and interpret relevant financial information to support quality-related initiatives
6. Discuss the use of non-financial performance data to support quality-related initiatives
7. Describe and understand techniques that can be used to detect and correct quality problems
8. Describe lean manufacturing and changes in management accounting systems to support a change
to “lean”
New in this Edition
Two new end-of-chapter problems and three updated/revised end-of-chapter problems
Expanded discussion of “net promoter score” as a non-financial performance indicator
One updated Real-World-Focus (RWF) items plus eight totally new RWF items, covering the
following topics: Creating a Culture of Quality; Lowering Health Care Costs & Improving
Quality; Quality Ratings for Colleges?; How Costly Is Poor Quality?; Time-Based Competition:
Reducing New-Product Development Time & Customer Response Time; U.S. Environmental
Quality Ratings for Building Construction; Flattening the Corporate Pyramid: Creating a Lean
Management Structure; and, Application of ‘Root-Cause Analysis’ to the Airline Industry.
Teaching Suggestions
We usually cover this chapter in two class meetings. In the first meeting we discuss the strategic role of
quality and the anticipated returns associated with quality-related investments and initiatives. The
conceptual relationship between improved financial performance and investments in quality is depicted in
text Exhibit 17.1. This discussion has little to do directly with accounting but is meant to raise the issue
of accounting’s role in the management and control of quality for an organization.
We then transition to a definition of “quality” and a proposed framework for quality in which overall
quality (from the customer’s perspective) is decomposed into performance quality and quality of design
(see text Exhibit 17.2. We then present to students in Exhibit 17.3 a proposed framework for managing
and controlling quality. This framework is used to guide the discussion in the rest of the chapter. Within
this framework it is possible to identify areas where the accounting function can add value to the
organization. We generally conclude the first meeting by discussing different approaches to establishing
quality performance expectations (i.e., Six Sigma, Goalpost vs. Absolute Conformance, and Taguchi Loss
Functions) and examples of both financial (e.g., COQ reports) and non-financial quality indicators. In the
6th edition, the discussion of Taguchi Loss Functions is given more prominence by repositioning in from
the appendix to the body of the chapter.
With a conceptual foundation laid in meeting #1, we then proceed in meeting #2 to cover a number of
exercises and problems. A good strategy is to begin by covering COQ and COQ reports in some detail,
followed by an example or two of the use of non-financial indicators of quality. Time permitting, the
instructor can conclude meeting #2 by covering an assignment or two related to techniques that can be
used to detect/correct quality problems.
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Chapter 17 – The Management and Control of Quality
If a third class meeting is available, one of the more comprehensive problems at the end of the chapter
can be assigned.
Assignment Matrix
End-of-Chapter Assignments Chapter Learning Objectives Text Features
7th ed. 6th ed.
Transition
6e to 7e
X = Included in ConnectX
Est.
Time
1. Strategic importance of quality
2. Accounting’s Role
3. Comprehensive Framework
4. Approaches for setting performance e expectations
5. Financial information for supporting quality-related initiatives
6. Nonfinancial performance data
7. Detecting & correcting quality problems
8. Lean manufacturing & accounting for lean
Strategy
Service
International
Ethics
Sustainability
Brief Exercises
17-12 17-21 – X 5 min X
17-13 17-15 – X 5 min X
17-14 17-16 – X 5 min X
17-15 17-17 – X 5 min X
17-16 17-18 – X 5 min X
17-17 17-20 – X 5 min X
17-18 17-19 – X 10 min X
17-19 17-12 – X 5 min X
17-20 17-13 – X 5 min X
17-21 17-14 – X 5 min X
17-22 – New X 5 min X
17-23 – New X 5 min X
17-24 – New X 5 min X
17-25 – New X 5 min X
17-26 – New X 5 min X
17-27 – New X 5 min X
17-28 – New X 5 min X
17-29 – New X 5 min X
17-30 – New X 5 min X
17-31 – New X 5 min X
17-32 – New X 5 min X
17-33 – New X 5 min X
17-34 – New X 5 min X
Continued on next page…
Chapter 17 Assignment Matrix—Continued
End-of-Chapter Assignments Chapter Learning Objectives Text Features
7th ed. 6th ed. Transition
X =
1.
2.
3.
4.
5.
6.
7.
8.
Strat
Servi
Inter
Ethi
Sust
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Chapter 17 – The Management and Control of Quality
6e to 7e
Included in ConnectX
Est.
Time
Strategic importance of quality
Accounting’s Role
Comprehensive Framework
Approaches for setting performance e expectations
Financial information for supporting quality-related initiatives
Nonfinancial performance data
Detecting & correcting quality problems
Lean manufacturing & accounting for lean
egy
ce
national
cs
ainability
17-35 – New X 5 min X
17-36 – New X 5 min X
Exercises
17-37 17-47 – X 45 min X X
17-38 17-48 – X 50 min X
17-39 17-22 – X 20 min X
17-40 17-23 – – 25 min X
17-41 17-24 – – 30 min X
17-42 17-25 – X 50 min X
17-43 17-26 – X 25 min X
17-44 17-27 – X 15 min X
17-45 17-28 – – 30 min X X
17-46 17-29 – X 30 min X
17-47 17-30 – X 10 min X
17-48 17-31 – – 30 min X X
19-49 17-32 – X 30 min X X
17-50 17-33 – X 30 min X
17-51 17-34 – X 25 min X
17-52 – New X 30 min X
17-53 – New X 40 min X
17-54 17-40 – X 25 min X
17-55 17-37 – X 25 min X X X
17-56 – New X 30 min X X X
17-57 – New X 30 min X
17-58 – New X 25 min X
17-59 17-39 – – 15 min X X
17-60 17-41 X 45 min X
17-61 17-42 X 35 min X
17-62 17-43 X 60 min X X
17-63 17-44 X 25 min X
17-64 17-46 X 25 min X
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Chapter 17 – The Management and Control of Quality
Continued on next page…
Chapter 17 Assignment Matrix—Continued
End-of-Chapter Assignments Chapter Learning Objectives Text Features
7th ed.
EOC
6th ed.
EOC
Transition
6e to 7e
X = Included in ConnectX
Est.
Time
1. Strategic importance of quality
2. Accounting’s Role
3. Comprehensive Framework
4. Approaches for setting performance e expectations
5. Financial information for supporting quality-related initiatives
6. Nonfinancial performance data
7. Detecting & correcting quality problems
8. Lean manufacturing & accounting for lean
Strategy
Service
International
Ethics
Sustainability
– 17-35 Deleted – 40 min X X
– 17-36 Deleted – 30 min X X
– 17-45 Deleted – 15 min X
Problems
17-65 17-49 Moved – 60 min X X X
17-66 17-57 Revised – 60 min X X X
17-67 17-38 Moved – 60 min X X X
17-68 17-54 Revised – 25 min X
17-69 17-55 – – 50 min X X
17-70 17-50 Revised – 60 min X X X X
17-71 17-51 Revised – 60 min X
17-72 17-58 – – 60 min X X X
17-73 17-59 – – 25 min X X X
17-74 17-53 Revised – 50 min X X
17-75 17-61 – – 50 min X X
17-76 17-62 – – 60 min X X
– 17-52 Deleted – 50 min X X X X
– 17-56 Deleted – 60 min X X X
– 17-60 Deleted – 60 min X
Lecture Notes
This chapter examines the importance of quality and how management accounting can add value to the
organization through the creation of a comprehensive system for managing and controlling quality. Issues
relating to quality are particularly important today because they affect a company’s ability to compete in
the global marketplace and involve interdependencies across the entire sphere in which the organization
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Chapter 17 – The Management and Control of Quality
operates. The 2001 Ford Explorer-Firestone recall episode is an example of the high price from likely a
small defect in product quality.
Introduction
Perhaps the biggest challenge in the chapter is to motivate accounting student interest in the topic. For
this reason, the introductory sections of Chapter 17 embrace this objective. We suggest that the instructor
motivate interest in the subject by discussing the following major points:
oBaldrige Award, ISO-9000, and ISO-14000
oThe Real-World Focus (RWF) items included at the beginning of the chapter, which are designed
to have students think about quality in both business and non-business contexts (new RWF items
dealing with child care services, environmental reporting, and corporate social responsibility
should be particularly useful in this regard)
oConceptual Relationship between Quality Initiatives and Profitability (see Exhibit 17.1)
Quality and Total Quality Management (TQM) Defined
The next recommended step is to cover with students definitions for quality and for TQM. A quality
product or service meets or exceeds customer’s expectations at a competitive price they are willing to pay.
Exhibit 17.2 is a useful diagram for framing the discussion of the decomposition of quality into
Performance Quality and Design Quality. The former is covered in Chapter 17 while the latter is covered
in Chapter 13 (Target Costing).
General Framework for Managing and Controlling Quality
Exhibit 17.3 should then be discussed with students because it provides a “big-picture” view of a process
that can be used to manage and control quality. We recommend that the instructor review with students
“key elements” of the framework. This diagram is important because most of the rest of the discussion in
the chapter can be related back to this general model. Of course, Exhibit 17.3 contains but one possible
framework. Students should recognize that other frameworks are possible and that the framework
depicted in Exhibit 17.3 can be modified according to the situation and the desires of management. Some
of the major points that can be emphasized in conjunction with text Exhibit 17.3:
othe model is customer-based (i.e., for the most part externally oriented)
othe model included feedback loops (continuous improvement philosophy)
ooverall, accounting’s role in the model is to supply relevant information, both financial and
nonfinancial in nature
ofinancial information is of two general types: relevant cost information (similar to the
conceptualization presented in Chapter 11 of the text) and Cost of Quality (COQ) Reports
ononfinancial information can be either internal or external (i.e., customer-satisfaction data) in
nature
oas with several other topics discussed in the course, the underlying model assumes participation
from different functional areas, that is, requires broad business inputs
Having presented the overall framework, discussion can then turn to the question of a proper (i.e., value-
added) role that accounting can play in terms of supporting managerial initiatives in the quality area. The
answer to this question would include a short discussion regarding the deficiencies of many current
accounting systems as regards this objective.
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Chapter 17 – The Management and Control of Quality
One advantage of adopting a general framework (such as the one depicted in Exhibit 17.3) is that it can
be applied to new challenges and demands on the organization’s management accounting system. For
example, the framework could be used as a guide to responding to changes precipitated by a move to lean
manufacturing. Accounting’s response could be discussed within the context of the general framework
depicted in Exhibit 17.3.
Determining Quality Standards
After the model depicted in Exhibit 17.3 is discussed, the instructor can discuss with students different
approaches that can be taken to develop performance standards and expectations as regards quality. In
Chapter 17 we discuss the following alternatives:
oSix Sigma performance level (including the DMAIC methodology)
oGoalpost conformance—conforms to a quality specification expressed as a range around the
target. (See Exhibit 17.4 in the text.)
oAbsolute quality conformance (robust quality conformance)–requires all products or services
to meet the target value exactly, not within a range. (See Exhibit 17.5 in the text.)
oTaguchi Quality Loss Functions (which depict quality costs/losses as a quadratic function—the
farther one gets from targeted specification for quality, the greater the “penalty” or loss to the
organization). The following topics are separately covered:
oLoss function, L(x), which can be used to depict the relationship between the total loss
due to quality defects and the extent of quality defects (i.e., deviation from targeted
specifications)
oTotal quality cost/loss and average (expected) loss?
oUsing the quality loss function (QLF) to determine tolerance?
Exhibit 17-5 illustrates the type of mathematical function represented as a Taguchi Loss
Function. In general, the function suggests that the total loss (L) from quality defects increases in
a quadratic function as the variations or quality defects increase and the total loss is a function of
two factors: the cost coefficient for the operation and the amount of deviation from the target
value:
L() = ( − T)2
Where: = observed value of a quality characteristic
= the cost coefficient
T = the target value of the quality characteristic
The cost coefficient is determined by = (Total Quality Cost) ÷ (Allowed Tolerance)2. The cost
coefficient increases as the allowed tolerance narrows.
For example, if the total quality cost is $60 and the allowed tolerance (allowed range of variance)
is 0.01, then the value of = $600,000. A reduction of the allowed tolerance by half (0.005)
increases the value of to $2,400,000. The cost of a quality defect increases as the allowed range
of variation decreases.
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Chapter 17 – The Management and Control of Quality
Financial measures and Cost of Quality (COQ)
The discussion can then turn to the types of financial information the accounting system can supply in
conjunction with the framework depicted in Exhibit 17.3.
Relevant Cost Data: Decision Making–if Chapter 11 has already been covered, then the instructor
can simply review with students the following terminology/cost classifications:
relevant cost (or revenue)
sunk costs
opportunity costs
The instructor can then talk about some of the decisions in the area of quality (e.g., move to JIT) that
can be addressed using the relevant costing framework.
Cost of Quality (COQ) Reporting–organizations incur the costs of quality (COQ) to prevent, detect,
and rectify the production of low-quality products. There are four types of costs in a COQ Report (see
Exhibit 17.8, Exhibit 17.9, and Exhibit 17.10):
Prevention costs–expenditures incurred to prevent the production of products or services that
do not conform to specifications. Prevention costs include:
– Quality planning costs
– Quality training costs
– Costs to install prevention programs
– Information system costs for measuring, reporting, auditing of quality
Appraisal costs–costs incurred to determine whether products or services conform to
specifications:
– Costs to inspect incoming materials, part, components, work-in process, and finished
products,
– Costs of test equipment and instruments
– Laboratory acceptance testing costs
Internal failure costs–costs incurred after defective products or services are in the processed
or completed but before they are delivered to customers:
–Costs of corrective action
– Rework and scrap costs
– Retesting costs
– Expediting and overtime costs
– Lost contribution from downtime/process disruptions
External failure costs–costs incurred to rectify quality defects after shipping defective
products or services reach the customer and lost contributions from missed opportunities as a
result of the delivery of defective products or services:
– Sales returns and allowances
– Replacements
– Warranty repairs
– Product liability insurance
– Penalties and litigation
– Lost sales and customers
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Chapter 17 – The Management and Control of Quality
Prevention and appraisal costs together are considered costs of conformance and while internal and
external failure costs together are considered costs of nonconformance.
COQ reports can help managers to gain more insight into quality problems and identify areas for
further actions. Successful quality programs often see a decrease over time in the COQ as a
percentage of revenues as well as in the sum of internal and external failure costs as a percentage of
the COQ.
Nonfinancial Quality-Related Data
At this point, the instructor can discuss nonfinancial quality-related information that might be produced
by the organization’s accounting system as part of its comprehensive framework (model) for managing
and controlling quality. For this purpose, it is useful to distinguish between:
ononfinancial internal (i.e., business process) measures
ononfinancial external (i.e., customer-satisfaction) measures (new to the 6th edition is the inclusion
of the “net promoter score” as a measure of customer loyalty/satisfaction)
The instructor should take the time at this point to discuss with students the strategic role of
nonfinancial performance indicators, as part of a comprehensive system for managing and
controlling quality.
Techniques to Identify and Correct Quality Problems
The chapter, and therefore discussion of text Exhibit 17.3, can conclude with a discussion of techniques,
from operations management, that can be used to identify and analyze quality problems. We include a
discussion of: control charts, histograms, Pareto diagrams, and cause-and-effect diagrams (also called
fishbone diagrams):
oA control chart is a graph of a series of successive observations of a particular step, procedure,
or operation taken at regular time intervals. A control chart is a tool to identify nonrandom quality
variation or trend in an operating process. Exhibit 17.11 shows examples of control charts. The
results of control charts often serve as inputs to other techniques.
oA histogram represents the frequency of quality attributes or events graphically as shown in
Exhibit 17-12.
oA Pareto diagram is a histogram of factors contributing to the quality problem, ordered from the
most to the least frequency. Exhibit 17-13 illustrates such a diagram.
oA Cause-and-effect diagram organizes causes and effects to sort out root causes and identify
relationships between causes or variables. It is often referred to as a “fish-bone” or “Ishikawa”
diagram. (See text Exhibit 17.14 and Exhibit 17.15.) These diagrams help pinpoint potential
causes of failures or defects. Four factors are often identified as causes:
– Machine – Methods
– Manpower – Materials
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Chapter 17 – The Management and Control of Quality
Lean Manufacturing and Accounting for Lean
As noted above, the general framework can be used to motivate a discussion as to how management
accounting and control systems might change in response to a managerial imperative, such as the need for
an accounting system that would support a firm’s move to “lean manufacturing.”
One strategy for teaching this material would be the following two-step process:
Define what is meant by “lean manufacturing” (so students are able to visualize the context for
which changes to the management accounting system are needed) (text Exhibit 17.16 can be used
to illustrate fundamental differences between lean and traditional manufacturing processes)
Some possible changes, consistent with the framework presented earlier in the chapter, that could
be made to an existing management accounting system. In this regard, the instructor could
discuss:
i) the sample Value-Stream Income Statement presented as Exhibit 17.17
ii) the summary comparison (full-cost accounting vs. lean accounting) presented in Exhibit
17.18
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