Cost Accounting (14th Edition)

680 CHAPTER 19 BALANCED SCORECARD: QUALITY, TIME, AND THE THEORY OF CONSTRAINTS
Exhibit 19-6 shows that both the inspection and the redesign alternatives yield net benefits
relative to the status quo. However, the net benefits from the redesign alternative are
expected to be $972,000 greater.
Note how making improvements in internal business processes affects the COQ numbers
reported in the financial perspective. In our example, redesigning the frame increases prevention
costs (design and process engineering), decreases internal failure costs (rework), and
decreases external failure costs (customer support and warranty repairs). COQ reports provide
more insight about quality improvements when managers compare trends over time. In
successful quality programs, companies decrease costs of quality and, in particular, internal
and external failure costs, as a percentage of revenues. Many companies, such as Hewlett-
Packard, go further and believe they should eliminate all failure costs and have zero defects.
How should Photon use financial and nonfinancial measures to evaluate quality performance?
They should utilize both types of measures because financial (COQ) and nonfinancial
measures of quality have different advantages.
Advantages of COQ Measures
Consistent with the attention-directing role of management accounting, COQ measures
focus managers’ attention on the costs of poor quality.
Total COQ provides a measure of quality performance for evaluating trade-offs among
prevention costs, appraisal costs, internal failure costs, and external failure costs.
COQ measures assist in problem solving by comparing costs and benefits of different
quality-improvement programs and setting priorities for cost reduction.
Advantages of Nonfinancial Measures of Quality
Nonfinancial measures of quality are often easy to quantify and understand.
Nonfinancial measures direct attention to physical processes and hence help managers
identify the precise problem areas that need improvement.
Nonfinancial measures, such as number of defects, provide immediate short-run feedback
on whether quality-improvement efforts are succeeding.
Nonfinancial measures such as measures of customer satisfaction and employee satisfaction
are useful indicators of long-run performance.
Decision
Point
How do managers
identify the relevant
costs and benefits of
quality improvement
programs and use
financial and
nonfinancial measures
to evaluate quality?
COQ measures and nonfinancial measures complement each other. Without financial
quality measures, companies could be spending more money on improving nonfinancial
quality measures than it is worth. Without nonfinancial quality measures, quality problems
might not be identified until it is too late. Most organizations use both types of measures
to gauge quality performance. McDonald’s, for example, evaluates employees and
individual franchisees on multiple measures of quality and customer satisfaction. A
mystery shopper, an outside party contracted by McDonald’s to evaluate restaurant performance,
scores individual restaurants on quality, cleanliness, service, and value. A
restaurant’s performance on these dimensions is evaluated over time and against other
restaurants. In its balanced scorecard, Photon evaluates whether improvements in various
nonfinancial quality measures eventually lead to improvements in financial measures.
Time as a Competitive Tool
Companies increasingly view time as a driver of strategy. 4 For example, CapitalOne has
increased business on its Web site by promising home-loan approval decisions in 30 minutes
or less. Companies such as AT&T, General Electric, and Wal-Mart attribute not only
higher revenues but also lower costs to doing things faster and on time. They cite, for
example, the need to carry less inventory due to their ability to respond rapidly to customer
demands.
4 See K. Eisenhardt and S. Brown, “Time Pacing: Competing in Strategic Markets That Won’t Stand Still,” Harvard Business
Review (March–April 1998); and T. Willis and A. Jurkus, “Product Development: An Essential Ingredient of Time-Based
Competition,” Review of Business (2001).