Toyota Target Costing
Quality cost measurement under activity-based costing
Wen-Hsien Tsai
National Central University, Chung-Li, Taiwan, Republic of China
Introduction Many companies in the world gradually promote quality as the central customer value and regard it as a key concept of company strategy in order to achieve the competitive edge (Ross and Wegman, 1990). Measuring and reporting the cost of quality (COQ) is the first step in a quality management program. Even in service industries, COQ systems receive considerable attention (Bohan and Horney, 1991; Carr, 1992; Ravitz, 1991). COQ systems are bound to increase in importance because COQ-related activities consume as much as 25 percent or more of the resources used in companies (Ravitz, 1991). COQ information can be used to indicate major opportunities for corrective action and to provide incentives for quality improvement. Traditional cost accounting, whose main functions are inventory valuation and income determination for external financial reporting, does not yield the COQ information needed. While most COQ measurement methods are activity/process oriented, traditional cost accounting establishes cost accounts by the categories of expenses, instead of activities. Under traditional cost accounting, many COQ-related costs are lumped into overheads, which are allocated to cost centers (usually departments) and then to products through predetermined overhead rates. For example, among various COQ-related costs, the rework and the unrecovered cost of spoiled goods caused by internal failures are charged to the factory overhead control account which accumulates the actual overhead costs incurred (Hammer et al., 1993, pp. 155-64). The predetermined overhead rates should be adjusted to incorporate the normal levels of various COQ-related costs, and excess COQ-related costs will be buried in overhead variances. The cost accounting treatment described above cannot satisfy the needs of COQ measurement. Thus, Oakland (1993, p. 210)
Wen-Hsien Tsai
National Central University, Chung-Li, Taiwan, Republic of China
Introduction Many companies in the world gradually promote quality as the central customer value and regard it as a key concept of company strategy in order to achieve the competitive edge (Ross and Wegman, 1990). Measuring and reporting the cost of quality (COQ) is the first step in a quality management program. Even in service industries, COQ systems receive considerable attention (Bohan and Horney, 1991; Carr, 1992; Ravitz, 1991). COQ systems are bound to increase in importance because COQ-related activities consume as much as 25 percent or more of the resources used in companies (Ravitz, 1991). COQ information can be used to indicate major opportunities for corrective action and to provide incentives for quality improvement. Traditional cost accounting, whose main functions are inventory valuation and income determination for external financial reporting, does not yield the COQ information needed. While most COQ measurement methods are activity/process oriented, traditional cost accounting establishes cost accounts by the categories of expenses, instead of activities. Under traditional cost accounting, many COQ-related costs are lumped into overheads, which are allocated to cost centers (usually departments) and then to products through predetermined overhead rates. For example, among various COQ-related costs, the rework and the unrecovered cost of spoiled goods caused by internal failures are charged to the factory overhead control account which accumulates the actual overhead costs incurred (Hammer et al., 1993, pp. 155-64). The predetermined overhead rates should be adjusted to incorporate the normal levels of various COQ-related costs, and excess COQ-related costs will be buried in overhead variances. The cost accounting treatment described above cannot satisfy the needs of COQ measurement. Thus, Oakland (1993, p. 210)