TQMA - Total Quality Management Accounting

By improving quality, companies will decrease expenses as well as increase Productivity and market share.
-W. Edward Deming

The purpose of writing this blog post is to equip the students with the basic concept of Management Accounting Role in the success of Total Quality Management (TQM), that focuses on customer satisfaction, and ensures continuous process improvement to provide defect free high quality and cost effective Products or services, through involvement of everybody in the organization. This helps in improving overall productivity and performance of the organization. 

How Management Accounting supports TQM?
The Management Accounting is a systematic methodology that supports TQM in determining the cost of quality (COQ) through its evidence – based cost analysis and decision making.

The guidelines for future cost effective activities are established on the basis of quality associated cost analysis of existing expenses.

Why cost of quality is important (COQ)?
As already described, the role of Management Accountant is to support TQM in arriving at cost of quality, that helps organizations in measuring and determining the utilization of its resources for manufacturing good quality of products or services, and preventing defects and failures.

Cost of quality is grouped into two main categories:
Category # 1 – Cost of quality control (cost of conformance)
Category # 2 – Cost of poor quality (cost of non-conformance)

Cost of quality is the sum of these two cost categories:
Cost of quality = Cost of quality control (category #1) + Cost of Poor Quality (Category #2)

Where as:
Cost of quality control = Prevention cost (PC) + Appraisal cost (AC)
Cost of poor quality = Internal failure cost (IFC) + External failure cost (EFC)

Let’s summarize cost of quality (COQ) equation:
COQ = Cost of quality control + cost of poor quality
       = (Prevention cost + Appraisal cost) + (Internal failure cost + External failure cost)

Then:
COQ = PC + AC + IFC + EFC
Now, we elaborate, costs related with category # 1 and category #2

Category # 1 – Cost of quality control
As mentioned earlier, the cost of quality control is divided into two parts:
Prevention cost (PC) and Appraisal cost (AC).

Let’s explain these costs:
Prevention Cost (PC)
Prevention cost is the cost of preventive action which is taken before the start of manufacturing process, to avoid defects and failures. The purpose of incurring prevention cost, is to reduce the cost of quality.

The related actions of prevention costs include:
· Training and development program
· Process design and control
· Process audits
· Research and survey of customer needs
· Assessment of potential suppliers
· Statistical process control (SPC).

Appraisal Cost (AC)
Companies incur appraisal costs to ensure that, products or services being produced are in conformance with its regulatory requirements, and in accordance with customer’s specifications and requirement.

The associated appraisal costs include:
· Inspection of incoming materials received from suppliers
· Inspection of in-process material
· Inspection of final products
· Inspection training
· Maintenance of test apparatus and equipment
· Customer satisfaction survey.

Category # 2 – Cost of poor quality
As mentioned earlier, the cost of poor quality is divided into two parts: Internal failure cost (IFC) and External failure cost (EFC).

Let’s explain these costs:
Internal Failure Cost (IFC)
Internal failure costs are incurred due to non-conformance of quality standards and defects in product or service are found before its delivery to customer.

The associated internal failure costs include:
· Rework cost
· Net scrap cost
· Corrective action cost
· Retesting cost
· Throughput lost cost.

External Failure Cost (EFC)
External failure costs are costs of defects, detected after the customer receives the product or service. The defects are the result of non-conformance of quality standards.

The associated external failure costs include:
· Complaints processing cost
· Warranty claims cost
· Lost reputation cost
· Lost future sales cost
· Dissatisfied customer cost
· Product returns cost
· Recalled product cost.

Summary
Management Accountant plays vital role in the success of TQM, that contribute in improving overall productivity and performance of the organization.

Management Accountant supports TQM through evidence –based cost analysis of existing expenses and establishes guidelines for future cost effective activities.

Management Accountant supports TQM in arriving at cost of quality (COQ), that helps organizations in measuring and determining the utilization of its resources for manufacturing good quality of products or services, and preventing defects and failures.

There’re four basic elements of cost of quality:
Prevention cost (PC), Appraisal cost (AC), Internal failure cost (IFC) and External failure cost (EFC).
 

Bibliography
William J. Stevenson: Rochester Institute of Technology, “Operations Management” 10th Edition (2008)

S N Chary, “Production and Operations Management” New Delhi:
Tata Mcgraw-Hil Publishing company Limited, Third Edition.