Innovative role of management accountants in strengthening quality
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
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:
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
Challenges to management accountants:
ought to accept the following challenges:
1) Great awareness for quality for achieving excellence in
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
1) Establishing an organization for quality.
2) Identification of customers needs and our perception of reading
3) Assessment of the organizations capacity to meet customers needs.
4) Finished Products must need the required standards of performance
5) Concentration on prevention and not on breakdown philosophy.
6) Education and training of employment for continuous quality
7) Quality management systems to be reviewed for excellent quality
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
Training to improve quality
Maintenance & Calibration of production & inspection of
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
Laboratory Acceptance Testing
Field Evaluation and testing
Inspection and Testing
Raw Materials 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:
Rework or Repair
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
Admitted repairs beyond warranty
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
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
13) Excess inventory
Challenge 3: Innovative Role of Management Accountants and Quality
A Management Accountant can make a considerable contribution in
strengthening quality dimension for achieving the coveted goal of excellence in
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
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
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;
8. Continually review scrap and recovery costs and the basis of their
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.