Question

Salem Corporation is producing product A. The company had problems related to quality. Customers have been returning the product in the last months.

            ABC costing method and ABM can be used to manage quality.

a.   Define each type of quality-related activity and give one example of each activity type.

b.   Suppose the managers implement an ABC system to measure the costs of quality. How could they use information from this system to improve the product?

Answer 1

ABC (Activity Based Costing) refers to the technique for determining the cost of activities and the output that those activities produce. The aim of ABC is to generate improved cost data for use in managing a company’s activities.

The ABM i.e. Activity Based Management is a much broader concept. It refers to the management philosophy that focuses on the planning, execution and measurement of activities as the key to competitive advantage.

A. Quality Related Activities Are as Under:-

1. Production Level Activity: - For maintaining Quality of product it is important that production should be as per the standards set for the product. For E.g. it should be checked that the proportion of raw materials used is as per standards.   

2. Inspection: - Products should be inspected properly before delivering to clients to ensure the quality. For E.g. Few Samples from should be selected from every batch produced and checked thoroughly.

3. Maintenance of Plant: - Plant and Machinery should be maintained properly for maintain the quality of products produced. For E.g. It should be checked if Regular maintenance of machinery is taking place.

4. Specifications: - It should be observed whether any specific orders if provided by customers have been incorporated in the product or not. For E.g. if any special design is required by the customer it should be incorporated in the product.

B. If managers Implement ABC System to measure the costs of quality, they could use this information to improve the product by following steps:

1. In ABC all activities are listed and evaluated.
2. Now costs related to each activities are determined in terms of its usefulness
3. Unnecessary activities are identified and eliminated.
4. After This Essential activities are evaluated and simplified.

So by eliminating unnecessary activities, more focus can be given on essential activities and as a result product will improve.