Chapter 17: Implementing Quality Costs IM 10
LO.5: What are the types of quality costs, and how are those types related?
F. Types of Quality Costs
1. There are four types of quality costs.
a. Prevention costs are costs whose purpose is to improve quality by preventing product
defects resulting from dysfunctional processing.
engineering and product modeling.
b. Appraisal costs are costs incurred to monitor and compensate for mistakes not eliminated
through prevention activities.
been shipped to the customer.
i. Although both types of failure costs are expensive, an organization would prefer to incur
internal, rather than external failure costs.
2. The TQM process will result in a cycle of benefits as shown in text Exhibit 17.9 (p. 698).
made in an enterprise.
b. This cycle of benefit will continue in a company that is profitable and secure in its market
share—two principal goals of an organization.
3. Quality costs can be summarized into two categories: (1) cost of quality compliance or assurance
of internal and external failure costs.
5. Information concerning quality costs is partially included in the accounting records and supporting
documentation.
system.
b. Actual or estimated costs may be used in measuring the cost of quality.
Chapter 17: Implementing Quality Costs IM 11
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publicly accessible website, in whole or in part.
c. A system in which quality costs are readily available or determinable provides useful
information to managers trying to make spending decisions by pinpointing the areas that
would provide the highest cost-benefit ratio.
6. Text Exhibit 17.11 (p. 700) indicates points in the production–sales cycle at which quality costs
LO.6: How is cost of quality measured?
G. Measuring the Cost of Quality
1. Theoretically, if prevention and appraisal costs were prudently incurred, failure costs would
costs.
2. Pareto analysis is one way management can decide where to concentrate its quality prevention
stated objective.
3. A company wanting to use TQM and continuous improvement should record and report its quality
necessarily enhance quality.
4. A firm’s chart of accounts can be extended to accommodate either separate tracing or allocating
p. 702).
5. High quality allows a company to improve current profits, either through lower costs or higher
LO.7: How are a cost management system and the balanced scorecard used to provide
information on quality in an organization?
2. Cost management involves using management accounting information for the purposes of setting
the promulgated strategies.
Chapter 17: Implementing Quality Costs IM 12
3. A strategic cost management accounting system reports more of the costs and benefits of
organizational activities than do financial accounting reports.
product failure, such costs should be accumulated by the CMS as a part of product cost.
b. Financial accounting requires that all production costs be inventoried and does not
distinguish whether such costs add customer value.
continuous improvement.
c. Financial accounting is monetarily based and therefore does not directly measure
nonfinancial organizational activities such as defects and customer complaints. Additionally,
i. A useful cost management accounting system ensures availability of information related
to nonmonetary occurrences (such as late deliveries or defect rates) and incorporates
4. One management accounting tool that is useful in implementing strategy is a balanced scorecard
a. A BSC can be used to provide information on quality and help frame management decision
processes.
and manage quality.
iii. Customers examples: ensuring that all employees are focused on important customer
criteria, such as lead time, quality, service, and price; empowering sales staff to offer
National Quality Award (MBNQA):
i. The learning and growth perspective of the BSC is compatible with, and reflective of,
information shown in the MBNQA workforce focus category.
Chapter 17: Implementing Quality Costs IM 13
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publicly accessible website, in whole or in part.
ii. The internal business perspective is compatible with the process management category.
iii. The customer perspective reflects the MBNQA’s customer and market focus category.
iv. The financial perspective can be seen in the results category.
c. Both the BSC and the MBNQA criteria emphasize the use of nonfinancial performance
measurements as indicators of progress toward organizational goals.
i. Text Exhibit 17.15 (p.705) lists goals and measurements for the BSC perspectives.
LO.8: How is quality instilled as part of an organization’s culture?
I. Quality as an Organizational Culture
continuous improvement.
3. Committed and consistent top management leadership is the catalyst for moving the company
customer expectations.
6. Text Exhibit 17.16 (p. 707) indicates how organizations have move along the path to quality.
7. “High quality” is not a static concept; when one problem has been solved, another one is always
waiting for a solution.
LO.9: (Appendix) What international quality standards exist?
J. Assessing Quality Internationally
1. General
a. To compete effectively in a global environment, companies must recognize the need for and
b. Standards are essentially the international language of trade; they are formalized agreements
2. ISO
Chapter 17: Implementing Quality Costs IM 14
publicly accessible website, in whole or in part.
a. The ISO 9000 series is a primary international guideline for quality standards.
i. The International Organization for Standardization (ISO), based in Geneva, Switzerland,
ii. Text Exhibit 17.17 (p. 709) describes the ISO 9000 “family” of standards.
b. The standard is written in a general manner and prescribes the generic design, material
c. ISO 9000 registration is required for regulated products sold in the European Union; however,
d. To be registered, a company must first submit to a quality audit by a third-party reviewer
e. Internally, certification helps ensure higher process consistency and quality and should help
f. ISO certification is not required to do business in the United States but many U.S. companies
3. EFQM
a. The European Foundation for Quality Management (EFQM) was founded in 1988 by the
d. The EFQM model’s effectiveness is indicated by its widespread use as a management
system and a means of organizational self-assessment.
e. The following fundamental concepts provide the model’s foundation:
i. Results orientation: Excellence is achieving results that delight all of the organization’s
stakeholders.
leadership, coupled with constancy of purpose.
iv. Management by processes and facts: Excellence is managing the organization through
interdependent and interrelated systems, processes, and facts.
Chapter 17: Implementing Quality Costs IM 15
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publicly accessible website, in whole or in part.
v. People development and involvement: Excellence is maximizing the contribution of
employees through their development and involvement.
vi. Continuous learning, innovation, and improvement: Excellence is challenging the status
vii. Partnership development: Excellence is developing and maintaining value-adding
partnerships.
Chapter 17: Implementing Quality Costs IM 16
publicly accessible website, in whole or in part.
Multiple Choice Questions
c. moving materials.
d. experiencing unscheduled production interruptions.
2. (LO.1) A graph of actual process results that shows upper and lower limits for the process and
which is used to detect when the process is out of control is known as a:
a. control chart.
a. Reliability
b. Performance
known as reverse engineering is:
a. process benchmarking.
a. Strategic benchmarking.
philosophy?
a. To dictate continuous improvement for an internal managerial system of planning, controlling,
and decision making for continuous improvement
7. (LO.3) Which of the following is usually maintained in the database of a customer loyalty system?
a. Frequency of use
8. (LO.4) To win the Malcolm Baldrige National Quality Award, applicants must show excellence in
all of the following categories except:
a. leadership.
Chapter 17: Implementing Quality Costs IM 17
9. (LO.4) All of the following are internal benefits of TQM except:
a. Increased customer trust and loyalty
b. Reduced number of errors
10. (LO.5) The four costs of quality can be classified into two categories:
a. Costs of compliance and costs of assurance
11. (LO.5) The four categories of costs associated with product quality costs are:
a. external failure, internal failure, prevention, and carrying.
categorized as a(n):
a. external failure cost.
a. appraisal cost.
a. warranty claims.
b. design engineering.
c. supplier evaluations.
d. lost contribution margin.
month:
Category Amount
Rework $ 725
a. $786
b. $1,154
c. $1,940
d. $2,665
Chapter 17: Implementing Quality Costs IM 18
Multiple Choice Solutions
1. b
2. a
3. c
4. d
9. a
10. c
11. b (CMA Adapted)