The main purpose of any business establishment is to make profits. In order to effectively do this, firms need to ensure they offer the best products or services; to attract and retain clients in the competitive markets. Customers, therefore, greatly determine the success or failure of any firm, hence the need to focus on them in running business operations. When customers are satisfied, they tend to attract more clients to a firm. To achieve this, products and services have to be of the highest quality, which entails certain costs in the process of production. Total Quality Management, therefore, is aligned with cost accounting; considering the associated benefits, principles, and tools.
Introduction: Definition of Terms
The term cost accounting refers to a method of tracking financial records aimed at capturing a firm’s costs of production. The process occurs through an assessment of the costs at each stage of production along with fixed costs. In this case, a company will, first of all, determine the individual costs of production, i.e., what it costs to create the final output; then compare these to the results gained, i.e., profits (ClearTax, 2018). Consequently, a firm is able to determine its financial performance. A firm can further use cost accounting to budget and establish cost control programs, which will eventually aid the company in improving net margins (ClearTax, 2018). Therefore, cost accounting establishes the actual costs related to the manufacture of a product or provision of a service by comparing fixed and variable costs to gains for profit analysis and budget preparation.
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On the other hand, Total Quality Management entails efforts made by a firm continually in a bid to ensure that customer loyalty and satisfaction is achieved. In this case, there is the recognition that quality entails differentiating the products or services of one firm from another in such a manner that one is superior over the other (Gutierrez-Gutierrez, Barrales-Molina, & Kaynak, 2018). Such is especially essential in situations where firms offer clients similar products: In order to gain competitive advantage, one has to ensure that their firm’s products are of higher quality than those of the competitor. Notably, moreover, when a client is satisfied with a product, there are higher chances that they will attract even more clients to the firm: The opposite occurs if a customer is dissatisfied. Through proper feedback and research, therefore, employees continually endeavor to improve usage, reliability, and durability among others (Gutierrez-Gutierrez, Barrales-Molina, & Kaynak, 2018). Thus, Total Quality Management defines a firm’s idea for durable success through ensuring client satisfaction.
From the above, it is then possible to define Total Quality Management from the perspective of cost accounting. Specifically, Total Quality Management would entail the pursuing of long-lasting customer satisfaction through ensuring quality by tracking costs of production along the supply chain. Notably, in seeking the highest quality for clients in Total Quality Management, a company incurs costs. These expenses can be referred to as the costs of quality. A firm will, therefore, incur costs of quality to control and ensure customer expectations of products or services are met (Huo et al. 2019). Along the supply chain, for instance, a firm may incur costs in preventing defects or evaluating the operations/procedures leading to the end product: Such may be costs incurred in process improvement, certifications, training of employees, inspecting machines and materials, or ensuring correct product designs. A firm may also incur costs of failure to ensure quality including massive disposal of scrap; returns and warranties; delays; the reworking of products; and lost sales among others. In Total Quality Management, nonetheless, the aim is to ensure minimal costs of failure to ensure the highest standards are met.
Total Quality Management and its Relationship with Cost Accounting: Benefits
The relationship between Total Quality Management and cost accounting is beneficial to firms in significant ways. Total Quality Management enables companies to increase their profit margins. Notably, through focusing on the client, companies increase their market base that eventually reflects on the profits made. Consequently, Total Quality Management also helps to satisfy not only clients but also employees. The biggest advantage of Total Quality Management, nonetheless, is the reduction of costs of production; which is an essential element of cost accounting. By determining the costs of production in relation to profits, moreover, cost accounting aids in evidence-based decision making-a significant factor for Total Quality Management. Notably, by understanding the processes and costs of production, firms can better communicate and improve quality, relationship with customers, and profits.
Knowing the costs of quality helps managers to be aware of the figures that further guide them in justifying investment processes, particularly for continuous improvement: Notably, one of the key aims of Total Quality Management is establishing a long-lasting relationship with clients (Dale & Plunkett, 2017). Other than justifying the investment processes; nonetheless, information on the costs of quality also helps to track the effectiveness of efforts made towards enhancing customer relations (Dale & Plunkett, 2017). In this case, for instance, tracking the costs on returned products can reflect progress or success if the returned items are minimal compared to previous records in a firm. Consequently, further understanding of quality costs helps in the reduction of mistakes and related expenses, which further contributes to meeting the expectations of clients in product quality.
Principles of Total Quality Management under Cost Accounting
Principles are rules that tend to influence how something gets done. In the case of Total Quality Management under cost accounting, the principles provide guidelines that can improve the performance of an organization through tracking the quality costs of production in a bid to ensure long-lasting customer satisfaction. Important principles under this include leadership, improvement; engagement of people; customer focus; process approach; relationship management; and evidence-based decision making.
Leaders at all stages of the supply chain aid in the provision of a direction and a sense of purpose for employees. In this case, they tend to provide guidelines that aid in the achievement of company objectives. Research indicates that “Leadership system refers to how leadership is exercised, formally and informally, throughout a company-the basis for and the way that key decisions are made, communicated, and carried out (Ross, 2017).” In order for the company to properly align their processes and resources to meet the aims of production, leaders need to create a sense of engagement and unity of purpose. Such not only ensure that quality objectives are met but also significantly reduce the costs of failure to ensure standards are achieved. A clear direction, for instance, implies a closer inspection of machines and materials occurs during the production processes. As a result, fewer customers complain about faulty products due to errors in machines or materials used. Leaders can ensure this by encouraging commitment to quality and providing the required resources and training.
Other than leaders, employees, too, play a significant role along the supply chain to ensure Total Quality Management. Cost accounting notes that when resources are effectively utilized, then variable and fixed costs maximally contribute towards the profits realized. Moreover, additional costs that may be incurred as a result of mistakes made by staff members on quality along the production process are minimized. Recognizing, empowering, and enhancing the competence of people at all levels of a firm is, therefore, an essential principle. Research further shows that improving the quality of employees’ experience improves customer satisfaction (Noe, Hollenbeck, Gerhart, & Wright, 2017). Achieving this requires effective communication and collaboration.
Another essential principle other than the above is the focus on the client. Notably, this is the essential focus of Total Quality Management; to meet and exceed expectations. Understanding the needs of the client, moreover, aids in the profit analysis of cost accounting. Particularly, in order to determine why sales were low, for instance, a firm will need to assess the needs of the client and whether the product or service effectively met that need. After that, budgeting of fixed and variable costs will entail structuring the production process to meet the determined expectations and raise profit margins. Accordingly, “How a firm determines longer term requirements, expectations, and preferences of target and/or potential customers and markets is important (Ross, 2017).” The use of this information to understand and anticipate the needs of clients also aids in improving customer performance (Ross, 2017). The focus on the customer, therefore, not only increases customer value, but also improves the customer base, and increases both market share and revenue. Eventually, a firm can realize higher profits compared to fixed and variable costs.
The process approach is yet another principle to be considered. This particular approach is especially important to the supply chain since an understanding of the relationship between all the activities that occur during production improves efficiency. In this case, there is the recognition that the stages of production are interrelated, such that a fault at one point will affect costs and quality at another point. Optimizing this system ensures the best performance through efficient use of resources and effective process management. Such can occur through risk management at each stage of production as well as establishing accountability for the control of each of the processes.
In addition, relationship management should be considered as a principle of Total Quality Management under cost accounting. How the firm manages its relations with, for instance, suppliers; is important to the achievement of set objectives. Notably, along with other interested parties, suppliers significantly influence the success of a firm. In the case of cost accounting, suppliers determine the variable and fixed costs which eventually reflect on the quality of final products. Caring for this relationship ensures that the supply chain is well managed for stability in the flow of materials, goods, and services. To achieve this, firms need to consider collaborative development and short term benefits with long-term needs.
Finally, evidence-based decision making is another essential consideration. An analysis and evaluation of available data help make the right decisions for companies. Cost accounting, for instance, provides reliable data on costs of production compared to profit margins. Understanding the causes and effects, in this case, will aid in the making, reviewing, and changing of important decisions. To ensure this, firms should employ suitable methods, qualified personnel; monitor key indicators of performance; and ensure the accuracy and reliability of data.
Total Quality Management Tools and Quality Costing
Total Quality Management tools aid in identification, analysis, and assessment of quantitative and qualitative data relevant to organizations. The use of Total Quality Management tools help in the identification of figures and cause and effect issues in comparison to other organizations. Consequently, issues of quality, customer relations, and competitive advantage can be addressed. There are a number of Total Quality Management tools with varied approaches, including diagrams, charts, and analysis tools. The tools may, therefore, highlight not only financial analysis, market analysis, and various statistics; but also an assessment of customer needs, workflow analysis, and business structure. Pie charts, for instance, can be used to compare data like net income, while run charts can be used to identify changes in patterns like customer complaints. A focus group, on the other hand, may be applied in the testing of products, while a relations diagram can show the organizational workflow. Other significant tools, however, are Plan-Do-Check-Act and Quality Costing.
Plan-Do-Check-Act is a means to track the quality of improvements in companies. The tool is effective in meeting the aim of continuity for Total Quality Management: Notably, the process continues after evaluation and adjustments are made, unlike in previously discussed tools. Members of the organization can also monitor their contribution, hence contributing to the overall effectiveness of the approach (Arveson, 2019). The first step entails investigating available resources, then determining how one intends to achieve a particular purpose. After that, the ‘Do’ step involves implementing the plans made. The next step entails measuring the effectiveness of implemented changes. Finally, adjustments can be made in the ‘Act’ phase to ensure processes are re-aligned with original targets: This step entails consideration of new possibilities.
The quality costing method is another Total Quality Management Tool. The tool is important as a financial indicator that aids in the monitoring and control of expenses affiliated with the quality of the products during the process of production: Notably, high-quality products are a major factor in the attraction and retaining of clients. The quality costing method, moreover, aids in increasing competitiveness and saving money through attaining high customer satisfaction and detecting unnecessary costs (Neyestani, 2017). Eventually, the tool reduces quality costs to improve quality for the consumer. Further, “although there are numerous tools for measuring quality performance, the “cost of quality,” or “quality costs,” is the best indicator for this aim (Neyestani, 2017).” Accordingly, there are costs of conformance and non-conformance; such that the price of conformance is necessary to ensure the production process works, while the price of non-conformance are incurred expenses when this is not the case. The tool, thus, quantifies whether the aims of Total Quality Management are achieved: Notably, while Plan-Do-Check-Act tracks procedures after solutions are implemented, this tool traces quality improvement by analyzing costs.
All firms seek to make a profit in a competitive business environment. Cost accounting, on the one hand, refers to tracking a firm’s cost of production. On the other hand, Total Quality Management entails continued efforts to ensure long-lasting customer satisfaction. Considered from the perspective of cost accounting, therefore, Total Quality Management is pursuing long-lasting customer satisfaction through ensuring quality by tracking costs of production along the supply chain. This relationship has associated benefits including better communication between employees in a firm, improved quality of goods, a better relationship with customers, and increased profits. There is also justifying investment processes, tracking the effectiveness of efforts made towards enhancing customer relations; and reducing mistakes and related expenses. However, effectively implementing Total Quality Management under cost accounting entails considering certain principles like leadership, improvement; engagement of people; customer focus; process approach; relationship management; and evidence-based decision making. Finally, a variety of tools can be applied including diagrams, charts, and analysis tools; but especially Plan-Do-Check-Act and Quality Costing. An understanding of the relationship between Total Quality Management and cost accounting, therefore, is important for all firms at any stage of development.
References
Arveson, P. (2019). The Deming Cycle. Retrieved from https://www.balancedscorecard.org/BSC-Basics/Articles-Videos/The-Deming-Cycle
ClearTax. (2018, August 21). Cost Accounting - Concept, Objectives, Types & Methods. Retrieved from https://cleartax.in/s/cost-accounting
Dale, B. G., & Plunkett, J. J. (2017). Quality costing . Routledge.
Gutierrez-Gutierrez, L. J., Barrales-Molina, V., & Kaynak, H. (2018). The role of human resource-related quality management practices in new product development: A dynamic capability perspective. International Journal of Operations & Production Management , 38 (1), 43-66.
Huo, B., Ye, Y., Zhao, X., & Zhu, K. (2019). Supply chain quality integration: A taxonomy perspective. International Journal of Production Economics , 207 , 236-246.
Neyestani, B. (2017). Quality Costing Technique: An Appropriate Financial Indicator for Reducing Costs and Improving Quality in the Organizations.
Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2017). Human resource management: Gaining a competitive advantage . New York, NY: McGraw-Hill Education.
Ross, J. E. (2017). Total quality management: Text, cases, and readings . Routledge.
