MA – L2 – Q7 – Models of Evaluation Quality

7 COST AND QUALITY

Explain briefly how each of the following management accounting techniques can be used to analyse the relationship between cost and quality:

(1) Total Quality Management (TQM)

(2) Activity Based Costing (ABC)

(3) Balanced scorecard

(4) Just in Time management (JIT)

(5) Value analysis

(1) Total Quality Management
TQM seeks to reduce quality costs, where quality costs are categorised as:
Prevention costs
Appraisal costs (inspection costs, etcetera)
Internal failure costs (costs of scrap, waste, re-working and so on)
External failure costs (cost of lost customer goodwill, lost sales, returned goods from customers, warranty costs)
The aim should be to improve quality and reduce total quality costs.
TQM also seeks continuous improvement: improvement can be achieved by reducing costs or improving quality.

(2) Activity based costing
A system of ABC might identify activities related to achieving quality, such as quality planning and control, and a cost driver for those activities. ABC could then be used to identify the costs related to the quality activity.

(3) Balanced scorecard
In a balanced scorecard, cost targets could be an element for the financial perspective. Quality targets could be an element in the balanced scorecard for the internal perspective or the customer perspective.

(4) Just in Time management
JIT seeks reductions in costs through improvements in production performance. The aim is to eliminate breakdowns and bottlenecks, so that items can be manufactured as quickly as possible.

(5) Value analysis
Value analysis looks at activities and costs in the value chain, and attempts to identify ways of adding more value. Value is added by providing extra quality (where the value of the extra quality is less than any additional cost) or by providing the same quality at less cost.