MEASURING THE COST OF QUALITY THROUGH ACTIVITY-BASED COSTING & TAGUCHI METHOD: CASE STUDY OF A PAKISTANI MANUFACTURING FIRM

Abstract

This research aims to pave a path for systematically recording the Cost of Quality (CoQ) components. Accurate classification of quality costs can help a company to evaluate its expenditures better. Both qualitative and quantitative methods are applied to interpret results. Failure costs against desired improvement efforts are recorded through Activity-Based Costing (ABC). Information about the relative importance of controllable and technical efforts to reduce failure costs is derived from informal interviews with top management. Pearson Correlation is carried out to identify the existence of any significance relationship between the cost drivers. Taguchi value loss function is then used to calculate costs of underutilised capacity, technical problems in production machines, downtime costs due to gas and electricity failures, etc. A case study of a local food manufacturing company is discussed to illustrate the application of methodology. It is found that major problems are faced in collection of relevant data. Once the data is collected, further techniques could easily be applied. The research helps to provide a clear technique to identify losses at different stages. Also, it helps to pinpoint variation just at the point of occurrence, correcting policies and better estimation of the cost of foregoing quality standards. Mere application of ABC to record CoQ to derive effective results is not found enough. Qualitative and quantitative efforts should be carried out side by side for a better assessment of quality failure.

Keywords: Cost of Quality; Activity-Based Costing; Taguchi Method.