Performance Management

Question 1

Quality Management

What is the importance of adding customer value in a competitive market? (1)

How can quality be used as a differentiating factor? (1)

What forms can quality take from the customer’s point of view? (5)

How can quality be a source of competitive advantage? (2)

Why can failure of quality be commercially catastrophic? (2)

Answer 1

Quality Management

What is the importance of adding customer value in a competitive market?

Businesses must deliver value that customers recognise and are willing to pay for

• Helps attract and retain customers
• Essential for competing effectively

How can quality be used as a differentiating factor?

Quality allows a business to stand out from competitors

• Customers may choose a product/service based on superior quality
• Supports premium pricing or stronger loyalty

In what forms can quality appear from the customer’s point of view?

Quality can take many forms, always defined by the customer

• Value for money
• Reliability of product and/or service
• On time and in full (OTIF) delivery
• Durability of the product
• Customer support

How can quality be a source of competitive advantage?

Quality strengthens both cost‑leadership and differentiation strategies

• Cost leaders benefit from fewer defects and lower waste
• Differentiators benefit from superior customer experience

Why can failure of quality be commercially catastrophic?

Poor quality damages reputation, increases costs, and drives customers away

• Leads to returns, complaints, and lost sales
• Can permanently weaken competitive position

Question 2

Quality Management

What are the two broad strands of quality management? (2)

What is quality control? (1)

What are the key features of quality control? (3)

What is quality assurance? (1)

What are the key features of quality assurance? (3)

What was the traditional focus of firms regarding quality? (1)

Answer 2

Quality Management

What are the two broad strands of quality management?

Quality control and quality assurance

What is quality control?

Checking work after it has been completed to ensure it meets required quality standards

• Inspection‑based
• Identifies quality failures after they occur
• Reactive approach

What is quality assurance?

Taking steps to prevent quality failures before they happen

• Prevention‑based
• Focuses on designing processes that avoid errors
• Cheaper to “get it right first time” (GIRFT)

What was the traditional focus of firms regarding quality?

Traditionally, firms focused on volume performance

• Quality management mainly took the form of quality control, not assurance

Question 3

Total Quality Management (TQM)

What is the overall philosophy behind TQM? (1)

What are the key concepts within TQM? (3/2,2,2)

How should quality be managed throughout operations under TQM? (1/2)

Why is TQM beneficial for organisations? (1/2)

Answer 3

Total Quality Management (TQM)

What is the overall philosophy behind TQM?

TQM is a philosophy focused on doing things right the first time to be better, cheaper, and commercially preferable

• Emphasises prevention rather than correction
• Aims to eliminate waste, defects, and rework

What are the key concepts within TQM?

A commitment to making small, ongoing improvements rather than relying on big, infrequent changes

• Encourages constant refinement of processes
• Builds long‑term operational excellence

TQM requires participation from every employee, regardless of role or seniority

• Quality becomes everyone’s responsibility
• Encourages ownership, accountability, and idea generation

Quality assurance should occur at all stages of production and delivery

• Most effective when applied at the design stage
• Prevents defects before they arise

Why is TQM considered beneficial for organisations?

It improves efficiency, reduces waste, and strengthens customer satisfaction

• Supports competitiveness
• Essential for organisations aiming to operate as “lean”

Question 4

Cost of Quality Report

What are the categories of quality‑related costs? (4/5,2,3,5)

Answer 4

Cost of Quality Report

What are the categories of quality‑related costs?

• Prevention costs
  
  • Costs incurred to stop poor quality from occurring in the first place
    
    • Market research
      
      • Understanding customer needs so products are designed correctly from the start
    • Design testing
      
      • Trialling prototypes to catch design flaws early
    • Preventative maintenance
      
      • Servicing machinery to avoid breakdowns that cause defects
    • Quality planning and training
      
      • Teaching staff correct procedures to avoid errors
    • Supplier evaluation and selection
      
      • Checking supplier reliability to avoid receiving poor‑quality materials

• Appraisal costs
  
  • Costs incurred to check that materials, products, and services meet quality standards
    
    • Inspecting purchases, WIP, and finished goods
      
      • Checking raw materials on arrival or inspecting batches during production
    • Quality audits and testing
      
      • Running performance tests to ensure products meet specification before release

• Internal failure costs
  
  • Costs arising because products or services fail to meet required standards before reaching the customer
    
    • Scrapping, repairing, or reworking defective goods
      
      • Fixing faulty units on the production line or discarding unusable items
    • Downtime or stoppages
      
      • Halting production because a defect is discovered in the process
    • Excessive inventory costs
      
      • Holding extra stock (safety stock) to cover for expected defects or rework delays

• External failure costs
  
  • Costs arising due to quality failures after goods or services have been delivered to the customer
    
    • Scrapping, repairing, or reworking returned goods
      
      • Fixing or replacing faulty products sent back under warranty
    • Collecting and redelivering rejected goods
      
      • Paying for courier collection and replacement delivery
    • Handling customer complaints
      
      • Staffing a complaints team to resolve issues caused by poor quality
    • Warranty replacements
      
      • Providing free replacements when products fail prematurely
    • Damaged brand reputation and lost sales
      
      • Customers switching to competitors after repeated quality issues

Do the costs as a percent of the sales

Question 5

Key Indicators on the Cost of Quality Report

What are the key indicators to look for in a cost of quality report? (3)

Answer 5

Key Indicators on the Cost of Quality Report

What are the key indicators to look for in a cost of quality report?

• The proportions of prevention and appraisal costs
  
  • These should increase over time
    
    • Because the business is investing more in avoiding defects
    • Indicates a shift toward proactive quality management
    • Leads to fewer failures and lower long‑term costs

• The proportions of internal and external failure costs
  
  • These should fall over time
    
    • Shows that fewer defects are occurring
    • Reflects better processes, better training, and better supplier quality
    • Reduces waste, rework, complaints, and warranty claims

• The total cost of quality as a percentage of sales
  
  • This should begin to fall
    
    • Because increased prevention/appraisal reduces expensive failures
    • Indicates improved efficiency and stronger profitability
    • Demonstrates that quality investment is paying off commercially

Question 6

Juran’s Curve

What does Juran’s curve suggest about managing quality‑related costs? (2)

Answer 6

Juran’s Curve

What does Juran’s curve suggest about managing quality‑related costs?

• There is a balance between compliance costs and failure costs
  
  • When one rises, the other tends to fall
    
    • More spending on prevention/appraisal reduces failures
    • Less spending on prevention/appraisal increases failures

• The goal is to find the minimum (optimised) total cost of quality
  
  • Achieved by balancing compliance and failure costs
    
    • Too much compliance spending becomes wasteful
    • Too little compliance spending leads to expensive failures
    • The optimum point minimises total cost while maintaining acceptable quality

Question 7

Impact on Profit

What factors should be considered when estimating the impact of a new quality initiative on profit? (3/4,4,5)

Answer 7

Impact on Profit

What factors should be considered when estimating the impact of a new quality initiative on profit?

• Cost of the initiative
  
  • Usually a prevention or appraisal cost
    
    • Prevention: e.g., training staff, improving processes, upgrading equipment
    • Appraisal: e.g., increased inspections, more testing, better monitoring
  • These costs are upfront investments aimed at reducing future failures

• Impact on sales volumes and contribution
  
  • Better, more reliable quality tends to please customers
    
    • Fewer defects → stronger reputation
    • More consistent performance → higher customer satisfaction
  • Can lead to increased market share
    
    • Customers switch to a more reliable supplier
  • Can allow higher prices
    
    • Higher perceived value supports premium pricing
  • Overall effect: higher contribution per unit or more units sold

• Impact on the cost of eliminating failures
  
  • Higher quality reduces the need for expensive failure‑related activities
    
    • Less rework, scrap, downtime, and complaint handling
    • Fewer warranty claims and returns
  • Leads to lower internal and external failure costs
  • Improves operational efficiency and protects brand reputation

Question 8

Answer 8

a) Proposal 1
This proposal will prevent 72% of defective units, as the current supplier appears to be responsible for this proportion of defects.
Assuming selling price stays the same but noted that selling price may be increased. Also, as defects not eliminated, it is assumed that the improvement in market share is proportional.

Proposal 2
This is another preventative measure.

Proposal 3
This is an appraisal cost, so will not prevent all the defects but it will stop the defective products being despatched. The savings generated by such a proposal would be the cost of recalling the defective product. The final delivery cost would still be incurred In other words, it prevents the external failures but not the internal ones. BUT there would be no external failures so the full potential market share could be achieved.(b) Risks and uncertainties

b) Risks and uncertainties

Assumptions around market share may be optimistic and simplistic.

• May not be linear in relation to defect detection
• May ignore actions of competitors
• Assumes customers are aware quickly of the quality improvement
  Assumptions around contribution and profit
• Selling price constant even though possible to raise it given quality improvements.
• No fixed costs impacted by improvements (eg overtime premiums etc)

b) Risks specific to each proposal

Proposal 1: change of supplier
- Quality risk:
- New supplier may not actually achieve the expected reduction in defects (72% is based on current analysis, which may be imperfect).
- Supply risk:
- Reliability, lead times, and flexibility of the new supplier may be worse.
- Cost risk:
- The £425,000 annual increase in material cost is an estimate; actual prices could be higher.
- Relationship risk:
- Ending a long-term supplier relationship may have knock-on effects (e.g. loss of informal support, priority, or credit terms).

Proposal 2: staff training

• Effectiveness risk:
  
  • The 60% reduction in defects assumes training is fully effective and sustained.
  • Skills may decay over time; new staff may not be trained to the same standard.
• Behavioural risk:
• Staff may resist new procedures or revert to old habits.
• Hidden costs:
• Lost production time while staff attend training.
• Possible need for refresher courses.

Proposal 3: inspection equipment

• Technical risk:
• The equipment may not be as accurate as claimed; some defects may still escape.
• Risk of breakdowns, maintenance downtime, or obsolescence before the end of four years.
• Cost risk:
  
  • Maintenance, calibration, and operator costs are not included in the calculation.
• Strategic risk:
• This is an appraisal solution, not a prevention solution:
  
  • Defects still occur; you just catch them earlier.
  • Long-term, it may be better to invest in process improvement rather than inspection.

Question 9

Environmental Management Accounting (EMA)

What is the definition of EMA (3)

Why is EMA becoming increasingly important (3) and what is that leading to (1)

What are … and … (2)

Answer 9

Environmental Management Accounting (EMA)

Definition of environmental management accounting

• Generation and analysis of financial and non‑financial information
  
  • Used to support environmental management processes
  • Helps organisations understand, measure, and manage environmental performance

Why EMA is becoming increasingly important

• Environmental costs can be large, especially in industrial sectors
  
  • Waste disposal, energy usage, pollution control, resource consumption
• Regulatory requirements and fines have increased significantly
  
  • Non‑compliance can lead to huge penalties and legal consequences
• Society expects companies to be more environmentally responsible
  
  • Customers, investors, and communities demand sustainable behaviour
  • Poor environmental performance damages reputation and trust

• Need for systems to measure, report, and monitor environmental costs
  
  • Organisations must track environmental impacts more accurately
    
    • Helps identify inefficiencies and cost‑saving opportunities
    • Supports sustainability reporting and compliance

What are Impacts and dependencies

• Dependencies
  
  • How environmental, social, and governance (ESG) issues affect the organisation’s ability to create and maintain value
    
    • e.g., reliance on scarce resources, exposure to climate risks
• Impacts
  
  • How the organisation affects environmental, societal, and governance issues
    
    • e.g., emissions, waste generation, community effects, ethical practices

Question 10

Benefits of Understanding Environmental Costs

What are the benefits of understanding environmental costs? (5)

Answer 10

Benefits of Understanding Environmental Costs

What are the benefits of understanding environmental costs?

• Better ability to control and reduce environmental costs
  
  • Managers can only reduce what they can see
    
    • Identifying waste streams helps cut unnecessary spending
    • Highlights inefficient processes that increase environmental impact

• Easier compliance with increasing global regulation
  
  • Environmental laws and standards are becoming stricter
    
    • Understanding costs helps plan for compliance investments
    • Reduces risk of fines, penalties, and legal issues

• Supports being a good corporate citizen
  
  • Demonstrates responsibility toward society and the environment
    
    • Builds trust with stakeholders
    • Aligns with ESG expectations and sustainability goals

• Improved brand image
  
  • Customers favour environmentally responsible companies
    
    • Strong sustainability performance enhances reputation
    • Can differentiate the business in competitive markets

• Increased visibility of product and activity costs
  
  • Environmental costs often remain hidden within overheads
    
    • Better visibility improves pricing decisions
    • Helps identify high‑impact products or processes for improvement

Question 11

Defining and Classifying Environmental Costs

What are the classifications of environmental costs? (4)
Definition and examples (3,4,3,2)

Answer 11

Defining and Classifying Environmental Costs - Hansen and Mendoza

What are the classifications of environmental costs?

• Prevention costs
  
  • Costs of activities undertaken to stop environmental impacts before they occur
    
    • Forming environmental policies
    • Feasibility studies and risk assessments
    • Staff training on environmental matters

• Detection costs
  
  • Costs involved in checking whether activities comply with environmental standards
    
    • Developing targets and policies
    • Monitoring performance
    • Inspections
    • Site survey costs

• Internal failure costs
  
  • Costs incurred when contaminants or waste are created but not yet released into the environment
    
    • Recycling
    • Repairs
    • Safe disposal

• External failure costs
  
  • Costs arising when waste or pollutants are released into the environment
    
    • Clean‑up
    • Decontamination

Question 12

Defining and classifying environmental costs - The US Environmental Protection Agency categorisation

4 Classifications (1definition, 1 example)

Answer 12

Defining and Classifying Environmental Costs

Conventional environmental costs

• Ordinary equipment, material, and overhead costs where reduced use benefits the environment
• Example: Fuel

Potentially hidden environmental costs

• Costs buried within overheads or other accounting categories
• Example: Travel

Contingent environmental costs

• Costs that may arise in the future due to environmental issues
• Example: Remedying failure

Image and relationship environmental costs

• Costs incurred to maintain or improve public perception or stakeholder relationships
• Example: Planting trees

Question 13

Externalised and internalised costs

Answer 13

Externalised and internalised costs

Externalised costs = negative effects felt by society as a whole
Internalised costs = impacts are contained within the organisation

Question 14

Sustainability Performance

What is the overall purpose of sustainability performance reporting (3)

What should organisations measure under the 3 aspects (7,3,2)

Answer 14

Sustainability Performance

What is the overall purpose of sustainability performance reporting?

• Sustainable practices are receiving increasing attention
• Organisations now include sustainability KPIs in internal management reporting
• Reporting also supports external compliance requirements

What should organisations measure under the environmental aspect?

• Energy consumption
• Water usage
• Waste generation
• Sustainable sourcing
• Supply chain emissions
• Investment in sustainable technologies
• Biodiversity impact

What should organisations measure under the social aspect?

• Community engagement and development
• Equality, diversity and inclusion
• Health and safety

What should organisations measure under the governance aspect?

• Diversity of directors
• Equality, diversity and inclusion amongst directors

ESG