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1
Kelompok 2
Fuad Muhammad
Ghanimah
Safitri Hanifa
1 INTRODUCTION
COSTS & PRODUCTIVITY:
Measurement, Reporting and Control
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QUALITY PRODUCT,
SERVICE: Definition
Is one that meets or exceedscustomer expectations.
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DEFECTIVE PRODUCT:
Definition
Is one that does not conform tospecifications. Zero defects is
the goal.
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Cost of Quality Defined
Costs that exist because poorquality does or may exist:
• Control activities to prevent,
detect poor quality.• Failure activities are responses to
poor quality.
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CATEGORIES OF QUALITY
COSTS
1. Prevention costs: incurred to prevent poor quality
2. Appraisal costs: incurred to determine whether
products, services conform to requirements,
customer needs
3. Internal failure costs: incurred when non-
conformance discovered & product, service re-
worked, scrapped, etc.4. External failure costs: incurred when products fail
to conform after delivery and recalled
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MEASURING QUALITY COSTS
Observable
Costs available in accounting records
Hidden
Significant
Not directly available in accounting records
Estimated
Multiplier method
Market research
Taguchi quality loss function
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Multiplier Method
Multiplier method estimates quality costs as
some multiple of measured failure costs.
Total external failure cost = k (Measured external failure costs)
The Market Research Method
Market research uses customer surveys &
interviews of sales staff to project future profit
losses.
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Taguchi quality loss function assumes that variations
from target value of quality characteristic causes
hidden quality costs regardless of specification
limits.
The Taguchi Quality Loss
Function
L(y) = k (y-T)2
L(y)[Quality loss * Actual value of quality
characteristic] = k [a proportional constant]
multiplier of (y-T)2 [external cost failure structure] *
(difference between actual and target value squared)
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TAGUCHI QUALITY LOSS
FUNCTIONQuality cost increases
symmetrically at an
increasing rate even
within specification
limits.
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How do we estimate the
organization’s externalfailure cost structure, k ?
k is estimated as c/d 2
where:
c =loss at lower or upper specificationlimit
d = distance of limit from target value
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Provides insights to companies seriousabout quality:
Reveals magnitude of quality costs bycategory Allows managers to assess financial impact
of quality costs in each category
Shows distribution of quality costs by
category Allows managers to assess relative
importance of each category
REPORTING QUALITY COST
INFORMATION
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Quality Costs % of Sales
Prevention costs:
Quality training $35,000
Reliability engineering 80,000 $115,000 4.11%
Appraisal costs:
Materials inspection $20,000
Product acceptance 10,000
Process acceptance 38,000 68,000 2.43
Internal failure costs:
Scrap $50,000
Rework 35,000 85,000 3.04
External failure costs:
Customer complaints $25,000
Warranty 25,000
Repair 15,000 65,000 2.32
Total quality costs $333,000 11.90%
Jensen Products
Quality Cost Report
For the Year Ended March 31, 2006
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QUALITY COST DISTRIBUTION
FailureCosts
ControlActivities
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ACCEPTABLE QUALITY
LEVEL (AQL): DefinitionIs the optimal balance between
control costs & failure costs.
AQL QUALITY COST GRAPH
Accepted level
of quality
Quality foregone;
failure accepted
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ZERO DEFECTS
MODEL: DefinitionClaims that it is cost
beneficial to reduce non-
conforming units to zero.
CONTEMPORARY
QUALITY COST GRAPH
Control costs
decrease as
percentage of defects
decreases.
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REDUCING QUALITY COSTS
Take direct attack on failure costs to drive them to zero
Invest in “right” prevention activities to bring about
improvement
Reduce appraisal costs according to results achieved
Continuously evaluate, redirect prevention efforts to gain
further improvement
The strategy is based on the premise that:
a) there is a root cause for each failure, b)causes are preventable, and c) prevention is
always cheaper.
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ABM & OPTIMAL QUALITY
COSTS
ABM classifies costs as value-added &
non-value-added and recommends
non-value-added costs be eliminated.
Value-added quality costs
Prevention activities, when performed
efficiently
Non-value-added quality costs Appraisal costs
Failure costs (both internal & external)
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TREND ANALYSIS:
TQC
Quality
Costs
Actual
Sales
Costs as
% of Sales
2004 $ 440,000 $ 2,200,000 20.0%
2005 423,000 2,350,000 18.0
2006 412,500 2,750,000 15.0
2007 392,000 2,800,000 14.0
2008 280,000 2,800,000 10.0
TQC TREND GRAPH
Although total quality
costs are decreasing,
we need to analyze its
components.
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TREND ANALYSIS:
TQC ComponentsPrevention Appraisal Internal
Failure
External
Failure
2004 2.0% 2.0% 6.0% 10.0%
2005 3.0 2.4 4.0 8.6
2006 3.0 3.0 3.0 6.0
2007 4.0 3.0 2.5 4.5
2008 4.1 2.4 2.0 1.5
TQC COMPONENT
GRAPH
Over time, quality costsshift from non-value-
added to value-added
(prevention) costs.
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USING QUALITY
COST INFORMATION
The Principal objectives of reporting quality costs
are to improve & facilitate a) managerial planning, b)control, and c) decision making.
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TOTAL PRODUCTIVE EFFICIENCY
When concerned with productive efficiency, 2 conditionsmust be satisfied:
Technical efficiency: For any mix of inputs that will produce agiven output, no more of any 1 input is used than necessary to
produce the output
Input trade-off efficiency: Given the mixes that satisfy thefirst condition, the least costly mix is chosen.
PRODUCTIVITY: MEASUREMENT
AND CONTROL
Productivity is concerned with producing outputefficiently, and it specifically adresses the relationship of output and the inputs used to produce the output.
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TECHNICAL
EFFICIENCY
IMPROVEMENTS
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INPUT TRADE-OFF EFFICIENCY
Managers must
weigh the trade-off
between labor &
capital for efficiencyof output.
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Partial Productivity Measurement
Partial productivity measurement is aquantitative assessment of productivity changes.
Productivity ratio = Output / Input
Operational productivity = 120,000 / 40,000
= 3 motorss per hour
Financial productivity = $6,000,000 / 480,000
= $12.50 of revenue per dollar labor cost
Conclusions that can be drawn about partial measures:
Existence of trade-offs mandates total measure of
productivity for assessing merits of productivity decisions
Because of possibility of trade-offs, financial productivity
must be measured
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TOTAL PRODUCTIVITY
MEASUREMENT:
Definition
Is measuring productivity for all inputs
simultaneously.
2005 2006
Number of motors produced 120,000 150,000
Labor hours used 40,000 37,500
Materials used (lbs.) 1,200,000 1,428,571
PRODUCT DATA
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PROFILE ANALYSIS: With No Trade-offs
Partial productivity
based on product
data.
PROFILE ANALYSIS: With Trade-offs
Trade-offs betweeninputs lowers the
materials
productivity ratio.
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PROFIT-LINKED
PRODUCTIVITY
MEASUREMENT
PQ = Current output/Base-period productivity ratio
Is measuring the amount
of profit change
attributable to
productivity change.
2005 2006
Number of motors produced 120,000 150,000
Labor hours used 40,000 37,500
Material used (lbs.) 1,200,000 1,700,000
Unit selling price (motors) $50 $48
Wages per labor hour $11 $12
Cost per pound of material $2 $3
PQ (labor) = 150,000/3 = 50,000 hrs
PQ (materials) = 150,000/0,100 = 1,500,000 lbs
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Cost of labor (50,000*$12) $ 600,000
Cost of materials (1,500,000*$3) 4,500,000
Total PQ cost 5,100,000
Cost of labor (37,500*$12) $ 450,000Cost of materials (1,700,000*$3) 5,100,000
Total current cost 5,550,000
Profit-linked effect
= Total PQ cost – Total current cost
= $5,100,000 - $5,550,000
= $450,000 decrease in profits
(1) (2) (3) (4) (2) – (4)
Input PQ* PQ X P AQ AQ X P (PQXP) –
(AQXP)
Labor 50,000 $ 600,000 37,500 $ 450,000 $ 150,000
Materials 1,500,000 4,500,000 1,700,000 5,100,000 (600,000)
Total 5,100,000 5,550,000 (450,000)
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PRICE RECOVERY COMPONENT
2006 2005 Difference
Revenues $ 7,200,000 $ 6,000,000 $ 1,200,000
Less: Cost of inputs 5,550,000 2,840,000 2,710,000Profit $ 1,650,000 $ 3,160,000 $(1,510,000)
Price recovery = Profit change – Profit linked productivity change
= ($1,510,000) – ($450,000)= ($1,060,000)
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Quality and Productivity
Is providing to a company’s entire workforce
cash incentives that are keyed to quality &
productivity gains
Gainsharing
Improving quality may improve productivity.
Reducing the number of defective units improves
quality; reducing the amount of inputs used
improves productivity.