ACCT2002 Chap.12 Balanced Scorecard and Costs of Quality
Balanced Scorecard and Costs of Quality
A Balanced Scorecard connects strategy to financial performance, customer satisfaction, internal business processes, and learning and growth. The perspectives form a causal hypothesis rather than a collection of unrelated measures: capability and learning should improve processes, which should improve customer outcomes and ultimately financial results. Quality management supplies a concrete test of that logic.
Prevention and appraisal activities aim to reduce internal and external failure, while non-financial measures such as defect rates, response time and on-time performance provide earlier signals than warranty or lost-customer cost. This chapter builds measure chains, classifies the four cost-of-quality categories and analyses delay without assuming that every desirable metric is fully under one manager's control.
What this chapter covers
- 01
Balanced Scorecard perspectives and strategic links
- 02
Lagging and leading performance indicators
- 03
Financial and non-financial quality measures
- 04
The four cost-of-quality categories
- 05
Prevention, appraisal and failure trade-offs
- 06
Customer-response time
- 07
On-time performance
- 08
Causes and cost of delays
Classify quality costs and read the pattern
- 4Training is prevention cost, inspection is appraisal cost, pre-delivery correction is internal-failure cost, and refunds plus field support are external-failure cost.
- 2Total quality cost is $260,000. Conformance cost is $100,000 and non-conformance cost is $160,000.
- 2External failure is the largest category and occurs after the customer is affected, so it carries reputational and future-demand consequences beyond the recorded amount.
- 2Management should test whether targeted prevention and process redesign reduce both internal and external failure; increasing inspection alone may detect defects without removing their cause.
Key terms
- Balanced Scorecard
- A strategy-linked system of financial and non-financial performance measures.
- Leading indicator
- A measure expected to predict or influence a later outcome.
- Lagging indicator
- A measure reporting an outcome after underlying actions have occurred.
- Prevention cost
- Cost incurred to avoid defects or service failures.
- Appraisal cost
- Cost incurred to detect whether output meets requirements.
- Internal-failure cost
- Cost of defects discovered before delivery to the customer.
- External-failure cost
- Cost of defects discovered after delivery to the customer.
- Customer-response time
- Elapsed time from customer request to delivery of the product or service.
Balanced Scorecard and Costs of Quality FAQ
Should the Scorecard perspectives be treated as separate lists?
No. A useful scorecard states a strategy and links capabilities, processes, customer outcomes and financial results through testable cause-and-effect assumptions.
Is inspection a prevention cost?
No. Inspection is appraisal because it detects defects. Prevention changes the process so defects are less likely to occur.
Why use non-financial quality measures?
Defect rates, rework hours and response time can reveal process problems earlier than financial failure costs, which may appear only after customers are affected.
Can quality cost fall while quality worsens?
Yes, if measurement is cut or failures go unreported. Interpret cost categories with operational and customer measures rather than using the total alone.
Exam move
For each strategic objective, write one measure, its direction, its data source and the next outcome it is expected to influence. Build a cost-of-quality table from new examples until the timing test is automatic. Draw response time as processing, waiting and delivery segments, then ask which activity adds customer value.
For viva practice, defend one causal link and name evidence that would refute it; that turns the Scorecard from decoration into a management-control hypothesis.
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