The Traditional Approach Or the Process Cost Model
Author: Mr D Wilson
Source of document: Open University
Date: 14/06/95
INTRODUCTION
The financial standing of a business is of great concern to management. Budgeting, fixed costs, accounting departments are all part of day to day business life. Quality, or the lack of quality, results in a cost that requires measuring and reporting on in some form.
The traditional approach to quality economics uses prevention, appraisal, internal failure and external failure as the four areas for data gathering. These areas follow a product's lifespan. Prevention covers areas such as product design and systems setup. Appraisal includes product reviews and inspections which can identify internal failure, resulting in rework and scrap. Finally external failure, which incurs warranty and field service costs.
The process cost model does exactly what it's title suggests.
The costs are based directly on individual processes. The model
uses process diagrams as a starting point. These diagrams are
then used to identify key aspects of the process. These key aspects
incur a cost, which is split into conformance cost and non conformance
cost. These costs include labour, materials, resources, standards
etc.
ADVANTAGES / DISADVANTAGES
Both approaches require data gathering, analysis and presentation of results. Each provides accountable data, for the cost of conformance/non conformance which is also the cost of quality or the lack of quality.
The concept of the traditional approach is relatively easy to understand. Explaining the split between conformance and non conformance costs of key aspects, used in the process cost model is difficult. Teaching managers the theory of the traditional approach takes less time.
The process cost model is a relatively new idea. It follows current quality ideas such as identifying and documenting processes. The traditional approach came into use in the 1950's. It therefore has factual data to back up the theory. This data can be used to check trends allowing companies to predict future costs. However this is an old idea.
Apportioning costs with the traditional approach can be difficult. Inspection can be seen as part of prevention during design reviews, appraisal for stage inspections, internal failure if a product is found to be faulty or external failure if a fault is found on receipt inspection by the customer. This leads to costs being seen as company wide costs of quality. With the process cost model, costs are clearly related to specific areas within a process. Monitoring of a project aimed at improving quality within a process can be conducted using the process cost model to mark the cost before and after the project. Changes in cost within a stable process will be directly related to the project.
Reports produced using the traditional approach are aimed at budgeting for departments or companies. This allows a holistic view of quality costs. The process cost model provides a report with more detailed costs. This can be used as part of the problem solving processes to select, record, evaluate and monitor areas that are increasingly expensive.
SUMMARY
Measuring the cost of quality must be achieved. The two established systems are; the traditional approach based on prevention, appraisal and failure and the process cost model based on individual processes.
The traditional approach has been around since the 1950's and is easy to understand. There is factual data to back up the theory. It follows a product's life span. Data produced can be used for budgeting from a holistic view of a company/department.
Apportioning costs is difficult with the traditional approach. Costs are generalised and are seen as the cost of quality.
The process cost model follows current quality ideas. Costs are attributed directly to areas within a process. Projects to improve quality can easily be monitored by the model.
Defining the breakdown of conformance and non conformance within key aspects is difficult. The model is a relatively new idea with little factual data to back the theory.
CONCLUSION
Both systems offer benefits from their use. The traditional approach is suited to manufacturing industry where costs are clearly split into the prevention appraisal failure path of a product's life span. The process cost model would be of use in the service industry where the process is easier to define than the service life span.
Use of a combination of the two ie the traditional approach for budgeting and the process cost model for problem solving and monitoring quality improvement, would allow for the best of both systems to used in the areas that each is particularly suited.