!logo.jpg (6328 bytes) . .

1_popup_home.gif (1391 bytes) i&e.gif (7340 bytes)

Excellence in manufacturing

  1. Shaukat Aziz visits Karachi
  2. The increase in wheat support price
  3. Trade deficit to continue
  4. Excellence in manufacturing

Innovative role of management accountants in strengthening quality management systems

BY Prof. Dr. Khawaja Amjad Saeed, FCA, FCMA
Nov 22 - 28, 1999

For a successful socio-economic development, an integrated and synergistic strategy is needed on six fronts namely, personnel, production, procurement, finance, marketing and research and development with innovative frontiers. The less developed countries are striving to move from agricultural development to industrial development. Manufacturing systems need revamping and revitalization. A comprehensive plan requires development of a sound and sustainable strategy, a well planned effort with controls of production, an excellent linkage with financial management, a supportive environmental framework, a focus on products design, variety and value, a correct decision regarding location and design of plant, layout of the facilities, equipment selection, maintenance of the equipment and related facilities, development of production systems designs, method study, work measurement, resource planning and handling people.

Quality is a critical aspect and this piece looks at various dimensions of quality as a strong logistic to excellence in manufacturing.

Review of literature: While considerable literature has been produced on Quality, main references are from two major sources namely, books written on Production/Operations Management and IFAC Handbook, 1999: Technical Pronouncements released in September, 1999 by International Federation of Accountants, New York. Chapter 5 deals with "Managing Quality Improvements" and contains lucid presentation of 134 paragraphs, eleven exhibits and three appendixes. Significant aspects cover defining quality, TQM, role of management accounting, TQM implementation guidelines, management processes, tools and measures, TQM implementation example, cost of quality, cost of quality in service industries, quality cost relationships and management accounting challenges.

Quality concept: Several definitions of quality are available. In this respect a comprehensive perspective has been innovatively contributed by IFAC.

Excellence in manufacturing and the management accountant: The World is being driven towards excellence as a hallmark in economic development with focus on manufacturing sector. Lot of activities are needed to be undertaken. In this respect, this piece looks at the new and innovative role of a management accountant. Several avenues have been highlighted. Expected contributions have been identified. The future role of management accountant has been visualized with the successful delivery system of logistics. The entire discussion centres around the future creative and new role of a Management Accountant in achieving Olympic heights of quality as solid logistics for manufacturing sector. The consequential benefits are expected to be immense to an organization.

Challenges to management accountants: Management Accountants ought to accept the following challenges:

1) Great awareness for quality for achieving excellence in manufacturing.

2) Effectively Communicate the message that achieving high quality will enable enterprises to reduce cost. In fact this would be beneficial for the managements.

3) Help enterprises in the development of high quality systems as their contribution to the manufacturing sector.

This paper focuses on explaining the above aspects.

Challenge 1: Awareness

Financial accounting role in respect of accounting cycle and preparation of financial statements including their analysis has been taken over by Computers. Financial Accountants are struggling to redefine their roles. Management Accountants role is a vibrant one. Their synergistic role needs to be expanded. They need to become dynamically effective in strong communication for creating awareness for quality movement. This area requires grooming of management accountants and they must perform this role. Challenges in this respect be accepted as opportunities for service. Internal Communication of the above message will be the positive response of management accountants on micro level. However professional institutes must hold seminars and workshops for creating awareness on Macro Level. An all encompassing and all inclusive effort is needed to achieve the spirit of quality movement in manufacturing sector. Having created quality awareness, Quality Policy must be developed. Practical guidelines in this respect are as under:

1) Establishing an organization for quality.

2) Identification of customers needs and our perception of reading their needs.

3) Assessment of the organizations capacity to meet customers needs.

4) Finished Products must need the required standards of performance and efficiency.

5) Concentration on prevention and not on breakdown philosophy.

6) Education and training of employment for continuous quality improvements.

7) Quality management systems to be reviewed for excellent quality improvements.

A well planned effort should be made to publicize the quality policy and ensure its implementation to achieve consequential benefits.

Challenge 2: Cost Reduction Via Quality Improvement

Generally the perception is that quality improvements may result in increase in cost. Our strong belief is that the implementation of quality drive will certainly result in achieving cost reduction. In this respect some aspects of cost of quality are given below:

1. Cost of Conformance

a) Cost of Prevention

b) Cost of Appraisal

2. Cost of Non-Conformance or Failures

a) Cost of internal failure

b) Cost of External Failure or lost opportunity

The following explanations will elucidate our earlier point that cost reduction will follow if quality improvements are ensured.

1(a) Cost of Prevention

It is the cost to ensure that customer requirements are met. Examples include:

• Quality Planning

• Quality Engineering

• Training to improve quality

• Maintenance & Calibration of production & inspection of equipment

• Supplier assurance

The objective is to ensure maintenance of quality systems.

1(b) Cost of Appraisal

It is the cost to ensure that the work processes are producing outputs that meet customer needs or requirements. Examples include:

• Quality data acquisition and analysis

• Quality measurement criteria

• Quality audits

• Laboratory Acceptance Testing

• Field Evaluation and testing

• Inspection and Testing

• Raw Materials Testing

• In-process Testing

• Review of test and inspection data

The above expenses are incurred after production, but before sales to identify defective items.

2(a) Cost of Internal Failure

These costs consist of not meeting Customer requirements, e.g. Cost of rework. Examples include:

• Scrap

• Rework or Repair

• Troubleshooting

• Re-inspect and re-test

2(b) Cost of External Failure (Lost Opportunity)

These cost relate to lost profits associated with not meeting external customer needs or requirements. Examples include:

• Customer service faults

• Products or service rejected and returned

• Products or services recalled for modification

• Repairs and replacements or added services provided under warranty

• Admitted repairs beyond warranty

• Product liability

• Customer losses due to poor quality

A dissatisfied customer may return the product. Goods may not be bought again. Other potential customers be informed about the bad experience of using goods. Consequently, lost profits may follow due to loss of market share.

A Management Accountant must specifically address the following issues:

1) Cost of quality by itself cannot resolve quality problems. It should be taken as a starting point.

2) The Management must understand the magnitude of the problem, identify opportunities and measure progress.

3) Effective improvement process be initiated to reduce the errors in an enterprise.

4) He must achieve a working knowledge of the measure to help quantify cost of quality.

A sample listing, as given in Appendix 3 (P-837) of the IFAC Handbook 1999: Technical Pronouncements is as under:

1) Installation failure

2) Scrap and rework

3) Re-inspection and re-test

4) Redesign and engineering changes

5) Soft toolings

6) Abandoned Programs

7) Billing Errors

8) Bad debts

9) Premium Shipping Costs

10) Supplier Cancellation Costs

11) Overdue accounts receivables

12) Off-spee/waivers

13) Excess inventory

Challenge 3: Innovative Role of Management Accountants and Quality Management Systems

A Management Accountant can make a considerable contribution in strengthening quality dimension for achieving the coveted goal of excellence in manufacturing.

His role may have the following frontiers:

1) Supportive Logistical Role

He can assist the senior management in developing awareness regarding quality, comprehending a clear understanding of quality, ensuring commitment to a well defined quality policy and developing indoctrination for correct quality systems and attitudes to pervade the organization. This aspect is of critical importance, failing which the entire exercise of developing quality for management excellence will be an infructurous one.

Traditionally, the function of managing quality was the exclusive domain of quality management staff, manufacturing and production engineering department personnel and production design and engineering department personnel. However, in today's time, TQM is fully recognized as a Company wide function and now requires many new players. The challenge to introduce TQM is to gather, measure and report information developed and operated by non-accountants. The crying need is to emphasize quality costs and clearly indicate the impact of quality on financial performance. Management Accountants stand trained in analyzing, measuring and reporting information focused on user needs, their expertise can be of assistance in the design and operation of comprehensive quality information gathering, measurement and reporting systems and integration of quality cost system.

Management Accountants should try to integrate quality cost systems into the existing management reporting and measurement systems. In this respect guidance may be sought from the enclosed Case Study released by IFAC and published in IFAC Handbook 1999: Technical Pronouncements, pp 829-831.

An enhanced role of a management accountant can earn him a dignified and well respected place in the enterprise if the management is convinced that poor quality can be a significant cost driver. Increase in quality cost can be avoided by ensuring that the organization must have:

a) Good material

b) Trained manpower

c) Well-maintained equipment and related facilities

d) Well conceived management processes

Consequently associated cost relating to scrap, rework, excessive inventories, process and equipment breakdowns, field service and product warranty claims can be significantly reduced, if not totally avoided.

IFAC - FMAC has suggested the involvement of Management Accountant in various activities in an enterprise in respect of the following:

Table No. 4

Management Accountants' Involvement in Quality Management Systems

1. Ensure that he or she is well represented on the main quality control committees and employee involvement teams;

2. Ensure that the company knows the competitive benchmarks, competitive gaps, customer retention rate, and the Cost of Quality;

3. Help identify areas of greatest quality opportunities;

4. Create a system of quality measures to monitor ongoing progress against quality goals, the existing reporting systems may need extensive reworking;

5. Ensure that accounting is involved intimately in vendor rating decisions;

6. Ensure that he or she takes part in selection procedures for a new manufacturing equipment by attending outside trials and viewings;

7. Discuss quality control effectiveness and the value of training courses for quality control personnel and operators with the human resources department; and

8. Continually review scrap and recovery costs and the basis of their evaluation.

Source: Extracted from IFAC Handbook 1999: Technical Pronouncements, New York: IFAC, PP 808.


Developments are much faster than the pen which records the same for cold print. Management Accountants face several challenges. Innovative and creative efforts are needed to identify new areas of contributions and effectively serve management for improving profitability, enhancing productivity, ensuring growth, providing leadership, paving the way for market penetration and providing delight to customers in meeting their needs. Management Accountants must lead from the front.