136 ACCOUNTING FOR MANAGERS
TheSix Sigmaapproach, developed by Motorola, is a measure of standard devi-
ation, that is how tightly clustered observations are around a mean (the average).
Six Sigma aims to improve quality by removing defects and the causes of defects.
Balanced Scorecard-type measures (see Chapter 4) are often used in Six Sigma,
which is well developed as a management tool in high-technology manufactur-
ing organizations. It is part of a larger performance measurement model called
DMAIC, an acronym for Define, Measure, Analyse, Improve and Control.
A holistic approach is taken by theBusiness Excellencemodel of the European
Foundation for Quality Management (EFQM; see also Chapter 4). The EFQM
model is a self-assessment tool to aid continuous improvement based on nine
criteria, five of which are enablers and four results. Each is scored in order to
demonstrate improvement over time, although a criticism of the model is the
subjectivity of the scoring system (further information is available from the EFQM
website at http://www.efqm.org)..)
Not only is non-financial performance measurement crucial in TQM, but
accounting has a significant role to play because of its ability to record and report
the cost of quality and how cost influences, and is influenced by, continuous
improvement in production processes.
Cost of quality.........................................
Recognizing the cost of quality is important in terms of continuous improvement
processes. The Chartered Institute of Management Accountants define thecost
of qualityas the difference between the actual costs of production, selling and
after-sales service and the costs that would be incurred if there were no failures
during production or usage of product/services. There are two broad categories
of the cost of quality: conformance costs and non-conformance costs.
Conformance costsare those costs incurred to achieve the specified standard of
quality and include prevention costs such as quality measurement and review,
supplier review and quality training etc. (i.e. the procedures required by an ISO
9000 quality management system). Costs of conformance also include the costs
of inspection or testing to ensure that products or services actually meet the
quality standard.
The costs ofnon-conformanceinclude the cost of internal and external failure.
Internal failure is where a fault is identified by the business before the prod-
uct/service reaches the customer, typically evidenced by the cost of waste or
rework. The cost of external failure is identified after the product/service is in
the hands of the customer. Typical costs are warranty claims, discounts and
replacement costs.
Identifying the cost of quality is important to the continuous improvement
process, as substantial improvements to business performance can be achieved by
investing in conformance and so avoiding the much larger costs usually associated
with non-conformance.
Two case studies illustrate the main concepts identified in this chapter.