QUESTION : Toyota reputation for quality is legendary and is the envy of carmakers worldwide.

In recent years this reputation was gravely tarnished by its enormous call-backs of defective products that caused profits to plunge into the reds for the first time in Toyota history.Disscuss and critically evaluate the role of management accountants in the area of quality management.

1.0 Introduction 1.1 Current Development Quality Management on Toyota was well known over the worldwide, and is the envy of carmakers. Recently, in first time of Toyota history, Toyota was entitled into an massive call-backs of cars which was started with a inappropriately located mats causing a recall of 4 million vehicles on year 2009, then more than 8 million vehicles recalled for sticking accelerator pedals. (Chandran, 2010) Frost & Sullivan estimates that Toyota is expected to lose a total of 80,000100,000 cars in lost sales to other vehicle brands in the first half of 2010. Thus, many of the cars owners were also concerned about the loss from resale price and public started to lose confident on Toyota brand as safe and trustworthy cars. (Chandran, 2010) 1.2 Objectives The Objectives of this report is to critically evaluate Cost of Quality (COQ) model in application of real case study. 1.3 Methodology This report majority I use secondary data to prove the Cost of Quality model and by searching journal articles on databases and website. Besides that, I also use reference books for referencing on writing this report.

2.0 Theory 2.1 Cost of Quality (COQ) Cost and Quality are fundamental principles to a manufacturing organization. Standard Costing is used in manufacturing organization as it provides cost information for the purposes of predict future cost and decision-making. Quality in an organization, defined as products or services meeting customers needs and expectation (Innes, 2004). The objectives of COQ are to acknowledge management accountants for emphasizing areas for improvement, and gained through quality improvement to satisfy customers requirement by measuring the potential benefits. (Desai, 2008, p. 27). The American Society of Quality (ASQ) defines COQ as the total costs incurred by investing in the prevention of non conformance to requirements, appraising a product or service for conformance to requirements, and failing to meet requirements (Crandall & Julien, 2010, p. 15). Measurement describes as starting point on looking towards control and

improvement. Measuring COQ can assist to highlight the importance of quality related activities, identify cost reduction and focuses high expenditure areas (Innes, 2004). Next, a broader classification of COQ is cost of conformance (COC) cost of nonconformance (CON). COC is the costs to fulfill all stated needs of customers and includes prevention and appraisal cost. Whereas CON is costs due to failure of existing process that contains internal and external failure (Desai, 2008, p.28 ).

COQ classified into four categories to verify quality of a product : Prevention costs relate to cost of preventing the appearance of high defects. Appraisal costs are costs associated with evaluation or auditing products or services to ensure conformance to customer requirements. Internal failure costs results when the product or services occurs defective rate prior delivery to customers. External failure costs occur after delivery to customers (Desai, 2008, p.29).

Cost of Quality Model

(Emerald, 2006) COQ Model illustrates relationship between COC and CON. The rationales of COQ model identify quality level (defect rate) of product needs to improve while lower the cost. When COC less than CON, it means COQ increases and also occurs high defect rate, so it reflects low investment in COC activities. When more investment in COC activities, it will bring a decline in CON, follow by COQ will be slightly lower, and defect rate decreases (Smith, Thorne, & Hilton, 2006). However, optimal quality level is COC and CON meets at a minimum point and indicates the lowest of COQ, whereas defect rates are acceptable that need to depend on generic strategic. Any further increase in COC activities above optimal point will cause increases in total COQ, and defect rate continues to be low (Smith, Thorne, & Hilton, 2006).

Figure 1 illustrates optimal quality level shifts from left to right for quality improvement that may achieved zero defect rate and maintain COQ at the lowest (Smith, Thorne, & Hilton, 2006).

2.2 Evolution of COQ In the earliest century, Juran who has developed the modern quality cost system. COQ model and theory can be found in Jurans Quality control handbook (1951). During the 1960s the ASQ and Quality Cost Committee refined the technique and promoted the use of Cost of Quality in 1970s and 1980s (Kaur, 2009, p.74). Then, COQ was popularized by Philip Crosbys book: Quality is free. During the 1970s and 1980s, Total Quality Management (TQM) derived as a vital management tool to execute statistical method for quality improvement (Weinstein, Vokurka, & Graman, 2009, p.2). 2.3 Benefits of COQ The main benefits when COQ model is applied into organizations are cost reduction along with quality improvements. Majority individual organization that applied COQ model, benefits that achieved in the short period was a reduction in the internal COQ. For examples: Rank Xerox and Motorola experienced a decline in internal COQ of 50% within three to five year. However, for long periods benefits achieved is it will cause customer satisfaction and market share increase, and also improved market standing (Innes, 2004). 3.0 Analysis of Case Study in applications 3.1 Background of organization

CRC Industries, Inc (CRC) is a worldwide organization. Production includes Industrial-Electrical and mechanical repair and maintenance, construction, mining, transportation, automotive, heavy duty, and marine products. Since 1997, CRC started on tracking cost of quality (Donovan, 2006, p.1). The second organization is a telecommunication organization. The paper authors keep the organization name confidential and refer it as Company A. Company A products are complicated, consequently it has 45,000 defect opportunities per assembly which considered very high (Schiffauerova & Thomson, 2006, p.3). Besides that, CRC build up total COQ with cost of materials and labor for rework, customer service errors, cost of correct shipping, and cost of product replacement and waste. In focusing on COQ, CRC do not only emphasize organizations balance sheet (Donovan, 2006, p.2). Company A calculates and gathers COQ information accurately according prevention, appraisal, internal and external failure cost in order to measures COC and CON. Company As COQ model measurement is COQ = (Prevention + Appraisal + (Internal + External Failure) + other costs)/cost of goods sold (Schiffauerova & Thomson, 2006, p.3). By having COQ as a driver, it helps CRC to save up hundreds of thousands of dollars and a decline of total failure dollars from 0.70% to 0.21% of sales (Donovan, 2006, p.1). Next, the effectiveness of COQ model applies in Company A shows COQ components are decreasing, and relieved to determine that failure costs over 18 months has reduced about 40%( Schiffauerova & Thomson, 2006, p.3). 3.2 Benefit 1 Firstly, benefit that achieve by CRC and Company A after applied COQ model in organization is the management accountants enable to identify specific areas for cost reductions, increase savings follow by improve and upgrade quality of the product effectively (Donovan, 2006, p.2). 3.3 Benefit 2 Second benefit is customer satisfaction increases. CRC trace the costs related to each complaint, so that management accountants enable to compile related COQ data, and identify problems as soon as possible to sustain customer satisfaction (Donovan, 2006, p.4).

Whereas, savings COQ in Company A, reflects every section of their process need quality improvement so that customers enable benefits from the in- house quality initiative and achieves improvement goals. In consequence, customer satisfaction also increases (Schiffauerova & Thomson, 2006, p.4). 3.4 Benefit 3 Both organization are able to achieve near zero defects. CRC link COQ to other area for improvement at CRC, resulting of hazardous waste and shipping error reduce (Donovan, 2006, p.1). However, Company A aim to achieve near zero defects by extending the quality and productivity improvements systems. (Schiffauerova & Thomson, 2006, p.4). 4.0 Issues 4.1 Issues in applications on COQ The common problems that have been found when applying COQ in organizations are the management accountants and team lack of understanding the concepts behind COQ model. Without a basic training, they are unable to track exact quality costs data and information. (Kaur, 2009. p.77).

Secondly is a acute lack of information and data, many management accountants do not appropriately collect COQ data and use in an effective manner, thus decisions are often made without considering impact on COQ. In result, many organizations profits are losing through poor quality (Schiffauerova & Thomson, 2006, p.8). Thirdly, problem that occurs in application is hard to track COQ. According to the profitable nature of business, sometimes it is quite difficult for management accountants to think that whether is necessary to track COQ (Kaur, 2009. p.77). 4.2 Reservations on COQ The COQ measurements usually are applied by manufacturing, electronics and other hightech organization, but today non-manufacturing organization are also interested to apply COQ model (Williams, Wiele, & Dale, 2000, p.444). However, reporting COQ data is not accepted by all types of organizations, especially smaller organizations do not try to track COQ and barely prepare quality budget

(Schiffauerova, Thomson, 2006, p.8). They point out that very few organizations divide COQ into appraisal, prevention, internal and external failures costs (Williams, Wiele, & Dale, 2000, p.444). 5.0 Conclusion COQ described as increase profitability by reducing operating costs incurred of poor quality products (Weinstein, Vokurka, & Graman, 2009, p.497). When produce products in high quality, improvement on products quality is critical for sustainable competitive advantage. Therefore, cost consider as central to the reporting structure for management accountants (Jaju, Mohanty, & Lakhe, 2009, p.1075). Role of management accountants is to improve the quality yet lower the cost, by making lesser mistakes and rework, fewer delays, and full use of raw materials when producing products. Indeed, lower costs lead to competitive advantage (Jaju, Mohanty, & Lakhe, 2009, p.1075). Next, the strength of COQ after was applied is reduce COQ and improve the quality simultaneously. With a lower prices and good quality, a company can lead to a more advanced performance measures on the significant of increasing customer satisfaction. Management accountants play a critical role in this process. (Williams, Wiele, & Dale, 2000, p.445) CRC Industries, Inc and Company A, have applied on COQ model, thus this proves that the COQ is quite strong in application. However, there are weaknesses behind COQ, which is management accountants are lack of training on quality management, and often left out some COQ data allocation, so will detract from accounts department critical role in COQ (Williams, Wiele, & Dale, 2000, p.448). At last but not least, my recommendation for companies is attempt and encouraged to apply COQ model. It is important to have a suitable COQ model to identify and analyze COQ problems, in order to reduced COQ and target areas for improvement (Schiffauerova & Thomson, 2006, p.8).

6.0 Reference Chandran, V. (2010, February 22). Impact Assessment of Toyotas Quality Issues on its North American Business. Retrieved October 20, 2010, from Inside Quality Insider: http://www.qualitydigest.com/inside/quality-insiderarticle/impact-assessment-toyota-s-quality-issues-its-north-americanbusiness.html Crandall, R. E., & Julien, O. (2010, july/august). Measuring the cost of quality. Industrial Management , 14-18. Desai, D. A. (2008). Cost of quality in small- and medium-sized enterprises: case of an Indian engineering company. Production Planning & Control , 19 (1), 25-34. Donovan, S. (2006). Using Cost of Quality to Improve Business Results. Retrieved October 21, 2010, from The American Society for Quality: http://asq.org/2006/04/cost-of-quality/using-cost-of-quality-to-improvebusiness-results.pdf Innes, J. (2004). Handbook of Management Accounting. Burlington: Elsevier and CIMA Publishing. Jaju, S. B., Mohanty, R. P., & Lakhe, R. R. (2009). Towards managing quality cost: A case study. Total Quality Management , 20 (10), 10751094. Kaur, P. (2009). Current Cost of Quality Management Practices in India in the Era of Globalization: An Empirical Study of Selected Companies. Decision , 36 (1), 73-99. Schiffauerova, A., & Thomson, V. (2006). Managing Cost of Quality: Insight into Industry Practice. The TQM Magazine , 1-10. 8

Smith, K. L., Thorne, H., & Hilton, R. W. (2006). Management Accounting 4th Edition:Information for managing & creating value. North Ryde: Mc Graw Hill Irwin. Weinstein, L., Vokurka, R. J., & Graman, G. A. (2009). Costs of quality and maintenance: Improvement approaches. Total Quality Management , 20 (5), 497-507. Williams, A., Wiele, A. v., & Dale, B. (2000). Quality Costing: A Management Review. International Journal of Management Reviews , 1 (4), 441-460.