2
MODERN BUSINESS
ENVIRONMENT
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ Explain modern business environment
❑ Discuss and apply the theory of constraints
❑ Evaluate total quality management, cost of quality, supply chain
management
© The Institute of Chartered Accountants of India
, 2.2 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
CHAPTER OVERVIEW
MODERN BUSINESS ENVIRONMENT
During the past two decades, the business environment in many sectors has been characterized
by rapid changes. The environment is ever changing and dynamic in nature. The modern business
environment has changed drastically and shaped entirely, in a very different manner. Now, it has
become a challenge for business managers to understand their business environment a nd
formulate business plans and policies accordingly. Business technology has advanced business
functions and operations to new levels. The role of accounting is one of the most reliable functions
in business.
The main revolution has been the transition from a seller’s market to a buyer’s market. Earlier the
supplier or service provider dictated the dimensions of a transaction:
Price - usually determined by a “cost plus” approach.
Response time - determined by the supplier.
Quality - determined by the service/ product provider.
Performance - dictated to the customer.
© The Institute of Chartered Accountants of India
, MODERN BUSINESS ENVIRONMENT 2.3
From a Sellers’ Market to Buyers’ Market
Today’s business environment is that of a buyer’s market. This trend is the result of international
transitions and macroeconomic, technological, political, and social changes. This environment is
characterized by:
▪ Globalization of the world economy.
▪ Fierce competition among organizations within and across countries.
▪ Global excess capacities in production, services, and in some areas of development.
▪ Using new managerial methods.
▪ Availability and accessibility of data and knowledge.
▪ Timely availability of materials and services.
▪ Ease of global travel and transportation.
The challenge for businesses today is to satisfy their customers through the exceptional
performance of their processes. Therefore, in this chapter, we first address the Cost of Quality,
Total Quality Management, and then focus on Supply Chain Management along with other modern
concepts.
COST OF QUALITY (COQ)
The concept of cost of quality has been around for many years. Dr. Joseph M. Juran in 1951 in his
Quality Control Handbook included a section on COQ. Mr. Philip B. Crosby in his book Quality Is
Free has popularized the COQ concept.
Quality is concerned with conformance to specification; ability to satisfy customer expectations and
value for money. Recognising the importance of cost of quality is important in terms of continuous
improvement process. The cost of control/conformance and the cost of failure of control/non-
conformance is the quantitative measure of COQ. It is the sum of the costs related to prevention
and detection of defects and the costs incurred due to occurrences of defects.
Views regarding Cost of Quality
spending cost of
on Good
to Higher quality cost
higherlower
qualitybyResult
In the past, it was assumed that increased quality is accompanied into
increased cost;
means higher cost. Today view of quality cost among practitioners seems fall into three categories:
▪ Higher quality means higher cost
Quality attributes such as performance and features cost more in terms of labour, material,
design, and other costly resources. The additional benefits which are gained from improved
quality do not compensate for the additional expenses.
▪ The resultant savings are greater than the cost of improving quality
© The Institute of Chartered Accountants of India
, 2.4 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
Deming promoted this view, which is still widely accepted in Japan. The savings result from
less rework, scrap, and other direct expenses related to defects. Japanese firms made
continuous improvements using this philosophy.
▪ Quality costs are those incurred in excess of those that would have been incurred if product
was built or service performed exactly right the first time
This view is held by adherents of the TQM philosophy. Here not only direct costs are
included, but also those resulting from loss of customers, loss in market share, and many
hidden costs and foregone opportunities not identified by modern cost accounting systems.
Components of COQ
Mr. Philip B. Crosby in his book Quality is Free referred to the COQ costs in two broad categories
namely ‘Price of Conformance’ and ‘Price of Non-conformance’. These two can be bifurcated
further in to prevention & appraisal costs and internal & external failure costs. Hence, COQ is often
referred as PAF (Prevention, appraisal & failure) model. In other words, ‘Price of Conformance’ is
known as ‘Cost of Good quality’ and ‘Price of Non-conformance’ is often termed as ‘Cost of Poor
Quality’.
Costincurr
cost incurr Due to
to Bring the
in quality
qualityor failures
Goods
Service
Prevention Costs
The costs incurred for preventing the poor quality of products and services may be termed as
Prevention Cost. These costs are incurred to avoid quality problems. They are planned and
incurred before actual operation and are associated with the design, implementation, and
maintenance of the quality management system. Prevention costs try to keep failure and appraisal
cost to a minimum.
Examples include the costs for:
Quality engineering
t ▪
Rear all ▪ Quality training programs
Quality planning
Examples▪
Quality reporting
Hot ▪
learn
© The Institute of Chartered Accountants of India
MODERN BUSINESS
ENVIRONMENT
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ Explain modern business environment
❑ Discuss and apply the theory of constraints
❑ Evaluate total quality management, cost of quality, supply chain
management
© The Institute of Chartered Accountants of India
, 2.2 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
CHAPTER OVERVIEW
MODERN BUSINESS ENVIRONMENT
During the past two decades, the business environment in many sectors has been characterized
by rapid changes. The environment is ever changing and dynamic in nature. The modern business
environment has changed drastically and shaped entirely, in a very different manner. Now, it has
become a challenge for business managers to understand their business environment a nd
formulate business plans and policies accordingly. Business technology has advanced business
functions and operations to new levels. The role of accounting is one of the most reliable functions
in business.
The main revolution has been the transition from a seller’s market to a buyer’s market. Earlier the
supplier or service provider dictated the dimensions of a transaction:
Price - usually determined by a “cost plus” approach.
Response time - determined by the supplier.
Quality - determined by the service/ product provider.
Performance - dictated to the customer.
© The Institute of Chartered Accountants of India
, MODERN BUSINESS ENVIRONMENT 2.3
From a Sellers’ Market to Buyers’ Market
Today’s business environment is that of a buyer’s market. This trend is the result of international
transitions and macroeconomic, technological, political, and social changes. This environment is
characterized by:
▪ Globalization of the world economy.
▪ Fierce competition among organizations within and across countries.
▪ Global excess capacities in production, services, and in some areas of development.
▪ Using new managerial methods.
▪ Availability and accessibility of data and knowledge.
▪ Timely availability of materials and services.
▪ Ease of global travel and transportation.
The challenge for businesses today is to satisfy their customers through the exceptional
performance of their processes. Therefore, in this chapter, we first address the Cost of Quality,
Total Quality Management, and then focus on Supply Chain Management along with other modern
concepts.
COST OF QUALITY (COQ)
The concept of cost of quality has been around for many years. Dr. Joseph M. Juran in 1951 in his
Quality Control Handbook included a section on COQ. Mr. Philip B. Crosby in his book Quality Is
Free has popularized the COQ concept.
Quality is concerned with conformance to specification; ability to satisfy customer expectations and
value for money. Recognising the importance of cost of quality is important in terms of continuous
improvement process. The cost of control/conformance and the cost of failure of control/non-
conformance is the quantitative measure of COQ. It is the sum of the costs related to prevention
and detection of defects and the costs incurred due to occurrences of defects.
Views regarding Cost of Quality
spending cost of
on Good
to Higher quality cost
higherlower
qualitybyResult
In the past, it was assumed that increased quality is accompanied into
increased cost;
means higher cost. Today view of quality cost among practitioners seems fall into three categories:
▪ Higher quality means higher cost
Quality attributes such as performance and features cost more in terms of labour, material,
design, and other costly resources. The additional benefits which are gained from improved
quality do not compensate for the additional expenses.
▪ The resultant savings are greater than the cost of improving quality
© The Institute of Chartered Accountants of India
, 2.4 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
Deming promoted this view, which is still widely accepted in Japan. The savings result from
less rework, scrap, and other direct expenses related to defects. Japanese firms made
continuous improvements using this philosophy.
▪ Quality costs are those incurred in excess of those that would have been incurred if product
was built or service performed exactly right the first time
This view is held by adherents of the TQM philosophy. Here not only direct costs are
included, but also those resulting from loss of customers, loss in market share, and many
hidden costs and foregone opportunities not identified by modern cost accounting systems.
Components of COQ
Mr. Philip B. Crosby in his book Quality is Free referred to the COQ costs in two broad categories
namely ‘Price of Conformance’ and ‘Price of Non-conformance’. These two can be bifurcated
further in to prevention & appraisal costs and internal & external failure costs. Hence, COQ is often
referred as PAF (Prevention, appraisal & failure) model. In other words, ‘Price of Conformance’ is
known as ‘Cost of Good quality’ and ‘Price of Non-conformance’ is often termed as ‘Cost of Poor
Quality’.
Costincurr
cost incurr Due to
to Bring the
in quality
qualityor failures
Goods
Service
Prevention Costs
The costs incurred for preventing the poor quality of products and services may be termed as
Prevention Cost. These costs are incurred to avoid quality problems. They are planned and
incurred before actual operation and are associated with the design, implementation, and
maintenance of the quality management system. Prevention costs try to keep failure and appraisal
cost to a minimum.
Examples include the costs for:
Quality engineering
t ▪
Rear all ▪ Quality training programs
Quality planning
Examples▪
Quality reporting
Hot ▪
learn
© The Institute of Chartered Accountants of India
