Question

Generally, companies that have quality processes and products have greater profit margins than their competitors. Please describe in your own words the reason that this happens and what steps an organization may take to focus more on quality.

Answer 1

Companies with more quality processes and products will enjoy more profit margin. The reason for this phenomenon can be explained by looking into major two factors in the profit margin.

1. Production activities
2. Selling activities

1. Production activities:

The quality of the processes and products mainly depends upon how the firm is able to produce with efficient use of its resources. Resources can be Direct materials, Direct labour and Overhead expenses. Let's discuss about each of these factors below:

a) Direct materials: The quality of materials used in the production process leads to better quality of final product thus increase the profit.

b) Direct labour: If the company employ more expert labour in the production, the production time and completion time per unit reduces. It also leads to better use of material input. All these contribute to the reduction in total manufacturing cost and thus lead to increase in profit.

c) Overhead expenses: These are indirect expenses incurred in the factory. It can be indirect materials, indirect labour and other operating expenses like depreciation, tax, insurance etc. Since these cost cannot be directly traceable to the final product, firm has to allocate these cost on a rational basis. Most of the time and effort of management accountants concentrates on controlling indirect expenses as well as rational allocation of these costs to the final product. Thus, better control and allocation the overhead, better the profit for the firm.

2. Selling activities:

Selling activities are really important to increase the profit because it include offering right product for the right market. Company will choose the product and market after doing a thorough study of the market and its environment. Then firm can formulate a plan on-

• How to penetrate into to market?
• Which marketing channel firm can use?
• How does the competitor will respond?
• What is the current demand for the particular product category in the market?
• What is the targeted market share within 3-5 years?

Steps to increase Quality of the product

1) Preventive maintenance: It can be-

• provide quality employee training.
• review of production equipment.
• review of product design.
• choosing the right suppliers who can supply quality materials.

2) Company should do quality checking of its process and product to make sure it maintain the expected quality. They can use statistical quality control tools, testing and inspection tools to achieve this purpose.

3) Company should concentrate on reducing the number of waste, spoilage, rework on the product, process to improve its quality of the product, thus overall profit.