Quality cost system for tourist facilities

SUMMARY

Today's extremely competitive environment requires tourism companies to make a constant effort to improve their operational processes. To carry out the same, many companies are implementing quality improvement programs or total quality in their facilities.

Total quality is a management style that affects all employees of the company, and that seeks to produce at the lowest possible cost products or services that satisfy the needs of customers, and that simultaneously seeks the maximum motivation and satisfaction of employees. The main objectives of a total quality program are defined in: producing at the lowest cost, achieving maximum satisfaction, both from internal and external customers.

The calculation and control of the costs related to the quality (or costs of the quality itself), allows to evaluate the programs of improvement of the quality. Obtaining quality costs becomes a very useful tool to detect the areas with the most problems within our tourist facilities, as well as to justify quality improvement actions and measure their effectiveness.

This paper exposes the concept of Quality Costs as one of the valid financial approaches to be applied in the conditions of our country. It proposes a Methodology applicable to any tourist facility that intends to use the Costs of Quality and Non-Quality as a management tool that allows the progress of the quality improvement program to be measured from a monetary point of view, optimizing efforts to achieve better levels of quality and increase its competitiveness.

1. INTRODUCTION

Quality and cost reduction will be the goal of business management trying to survive in today's environments. The adoption of TOTAL QUALITY has led many companies to introduce important changes both in the behavior patterns of costs related to production processes, as well as in their measurement and control. This has produced a metamorphosis in cost management, which translates into a rethinking of the traditional cost systems offered by Management Accounting.

That is why Management Accounting must find and propose techniques and procedures to implement, present and evaluate quality costs in the company.

2. THEORETICAL FOUNDATIONS OF QUALITY COSTS.

Business processes are carried out through a set of activities that are related among others to customer service, product distribution on the market, locating excellent suppliers, preparing and supplying information, delivery time and waiting, storage, inspection, transportation, quality, price and design, in addition to other activities to support the above.

A total quality program, focused on cost reduction, includes periodic verifications, in order to detect and analyze the possibility that unnecessary tasks are being carried out or that are no longer required by the control systems. It is often concluded that there is nothing more absurd than doing a job well that is not needed or that does not add any added value to the company's external or internal customers.

The total costs related to quality in a company are determined by the sum of the costs of obtaining quality (prevention and evaluation) plus the costs of faults or defects (internal and external). Normally, by increasing the cost of obtaining quality, the cost of failures is reduced, therefore, companies should look for the area in which their optimal total cost of quality is located. This zone would be located at the point where the total quality costs are minimal and the quality level is optimal.

In some circumstances, a company may be at a level where failure costs may be so low that it is no longer profitable to invest in prevention and evaluation. This level must be very close to the situation of zero defects. This optimal level of quality may depend on the technological level of the company, since automation and the use of very advanced technologies allow us to reach real situations of one hundred percent quality.

2.1 Cost of obtaining quality.

The costs of obtaining quality, also called compliance costs, can be defined as those costs that arise as a result of the prevention and evaluation activities that the company must undertake in a quality plan. Thus, prevention activities seek to prevent failures from occurring, while evaluation activities seek to detect failures as soon as possible and above all before products or services reach customers.

The costs of obtaining quality can be classified as controllable, since any company can decide the amount of resources that it is willing to invest in relation to this concept. A company may decide that these costs are very low, in which case it does not carry out any kind of prevention or evaluation work; or on the contrary, you can raise them as much as you want. The problem arises when trying to define to what extent costs are profitable, or in other words, to what extent they allow satisfactory income or an adequate reduction of other costs.

Generally, when a company implements a total quality program, the costs derived from it are usually high at the beginning. This is due to the fact that in the initial phase it must allocate large resources (financial, human, etc.) in the design of the program and in the training of employees. However, maintenance costs are usually low; both because the costs of training and design have already been borne previously, and because the costs of failures begin to be reduced as a result of the beneficial effects provided by the quality program.

These costs correspond to the items of expenses recorded in the General Accounting of any company. According to the chart of accounts of the General Accounting Plan, the allocation of these costs to each prevention or evaluation activity will be carried out based on the consumption that has been made of them.

2.1.1 Prevention costs.

As noted above, prevention costs are those incurred by the company trying to reduce or avoid quality failures. That is, they are costs of activities that try to avoid the poor quality of products and / or services.

All these activities generally consume a series of factors, whose accounting settlement must be recorded in the general accounting of the company, it is possible to easily assign costs, referring to quality, among the different operational activities implemented to carry out the quality programs. This distribution of costs could also be used for budget planning of quality prevention costs.

2.1.2 Evaluation costs.

Companies incur evaluation costs to ensure that products or services not conforming to quality standards can be identified and corrected before they are delivered to customers. In other words, they are measurement, analysis and inspection costs to ensure that products, processes or services comply with all quality standards and with the objective of satisfying the customer (external or internal). This verification requires the development of activities that generally also consume inputs recorded in the General Accounting, as occurs in prevention activities.

2.2 Failure or non-quality costs.

The failure of companies to achieve the desired level of quality is due to faults or defects, that is, non-quality, non-conformity or poor quality. The costs caused by the failures committed, normally, decrease depending on the effectiveness and efficiency of the investments destined to the prevention and evaluation of the quality. When a company, after having implemented a total quality program, begins to feel the effects of prevention and evaluation activities, it observes how its costs of non-quality are reduced.

The costs of failures, depending on when they are detected, can be divided into internal failure costs, which are those discovered before delivery to the customer, or external failure costs, when they are detected after the customer received the product or service. The cost of external failures should also be considered as the cost that is generated by delays in delivering the product to the customer, since such delays are a cause of dissatisfaction. Whenever the customer perceives the failure, it is considered to be an external failure.

One of the main problems in the accounting, planning and control of some failure costs, resides in the lack of conventional criteria to calculate the cost of the same. Due to this problem, it is usually necessary to classify these costs as tangible or explicit and intangible or implicit.

Tangible Costs

Tangible costs or explicit costs are those that can be calculated with conventional cost criteria, usually following generally accepted accounting principles. In general, these costs are accompanied by a cash outlay by the company, it is basically personnel costs and raw materials and materials.

Intangible Costs

Intangible costs, also called implicit costs, are those that are calculated with subjective criteria and that are not recorded as costs in accounting systems.

Most intangible costs are in the category of external failure costs, such as loss of image of the Company. However, they can also appear when the company incurs internal failures, for example the demotivation of employees.

In quantitative terms, the relative importance of intangible costs is greater than that of tangible costs. Many authors use the example of the iceberg, pointing out that most of the intangible costs are located in the hidden part of it, being ignored by conventional accounting systems, the tangibles being possessed in the visible part, implying that they are perfectly located in the accounting system.

Internal failure costs.

An internal failure is one in which the client does not feel harmed, either because he does not get to perceive it, or because it does not affect him. Whether these failures are not perceived by customers depends largely on the assessment activities undertaken by the company

External failure costs.

External failures are those that affect customers, since they are capable of perceiving them. Logically, when a product is being manufactured, if a failure is detected in the early stages of the production cycle, the cost is lower than if that failure is detected when the product has already been delivered to the customer, since in the latter case the product has many more operations incorporated. The cost of failure increases as more value is added to the product. That is why external failures, in addition to incurring the costs of internal failure, is increased by all the tangible costs that are caused when the customer perceives the failure (eg: claims processing, after-sales service, returns, etc..) plus the intangible costs that such failure also causes (eg:loss of image of the company, delay in the collection of sales, compensation, etc.).

The activities caused by external failures are the same as those needed to correct internal failures plus, all those that intervene to satisfy the customer by solving the problem caused as a result of the failure.

Here are some examples that demonstrate the importance of an organization striving to minimize Failure Costs:

• Accepting 3% of defective products or services implies accepting that for every 1000 Clients, there will be 30 dissatisfied.

• Accepting components with 5% defects implies accepting 950 good and 50 bad.

• When a Client complains, there are an estimated 260 dissatisfied Clients.

It could be said that the ideal percentage of Failure Costs would be zero, in practice, 6% or more offers great opportunities for improvement and 2% or less allows a great possibility of competitiveness.

The basic principle to obtain Quality in our days is the "Principle of Prevention", prevent first of all, prevent is better than redo, do things right from the first time, also take into account internal customers, that if you educate to employees on the principle that "the next step in the process is my Client", if each of the processes is made effective and efficient, Quality is achieved with efficiency, an objective that any organization that intends to compete in the Today's market, which intends to have loyal customers.

Statistical studies have shown that:

• For every $ 1.00 that is invested in Evaluation, the organization manages to reduce External Errors by $ 9.00.

• For every $ 1.00 invested in Prevention, the organization manages to reduce losses due to Internal Failures by $ 15.00.

In order to be able to compare the Quality Costs over time, a comparison base is taken that, the most used is the Real Sales, that is, what is compared is the coefficient of Quality Costs / Real Sales Volume, in such a way that the Quality Costs can increase, as long as the Real Sales Volume is increased in greater proportion.

3. THEORETICAL BASES OF THE PROPOSED COST SYSTEM.

Organizations that apply Economic Quality Management as guided by ISO, use one of the following three financial approaches:

• Cost of Quality Losses:

Referred to the expenses incurred by an organization due to poor quality.

• Cost of the Process:

They include:

Compliance Costs: Cost incurred to satisfy the stated and implicit needs of Clients in the absence of process failures.

Non-Compliance Costs: Costs incurred due to process failures.

• Quality Costs:

Costs incurred to ensure satisfactory Quality and give confidence in it, as well as losses incurred when satisfactory Quality is not obtained.

These three approaches are absolutely valid to be applied and the organization will be the only one that can decide which one to implement, taking into account its conditions, the characteristics of its products or services and the stage of development it is in with respect to the Management of the Quality.

We will focus our attention on Quality Costs, as they are the most comprehensive and detailed, and the one that in itself contains the other two approaches.

A Quality Cost System is an accounting technique and an administrative tool that provides Senior Management with data that allows them to identify, classify, quantify monetarily and prioritize the organization's expenses, with the objective of measuring the areas of opportunity and the monetary impact of the progress of the improvement program that is being implemented in the organization, to optimize efforts to achieve better levels of quality, cost and / or services that increase its competitiveness and affirm its permanence in the market.

3.1 Principles of operation of the proposed Quality Cost System.

- Each Quality Cost System must be a suit tailored to the organization that implements it.

The implementation of a Quality Cost System is carried out taking into account several factors, among which the following stand out: the characteristics of the product or service, the complexity of the process, the Client to whom it is directed and the progress achieved by the organization in the Quality improvement process.

- Summarizes in a single report and expressed in monetary units the quality and non-quality costs of the organization.

It allows the Management to know and evaluate the benefits obtained from an improvement process, based not on the reduction of errors, but on the reduction of costs. Generally, the Management gives more value to a quality report based on the reduction of costs than to another based on the reduction of failures.

- In a System of Quality Costs, the

Consistency than accuracy.

It is a rough indicator of the magnitudes and trends of costs. Its main purpose is to present the Management with the most impactful areas of opportunity in economic terms so that it can act on them as soon as possible. Delaying the information until obtaining exact data on costs is an error that can be very costly and even one of the causes that can end the implementation of any Quality Cost System, that is, the cost figures must be approximately correct rather than strictly wrong.

- A quality cost system must include the calculation and analysis of intangible costs.

- Errors and faults must not be hidden.

Staff must be trusted and made aware of the need for failures, whether or not they are perceived by customers, to be recorded and reported in order to be evaluated and taken into account in the quality improvement program. In the same way, the management must promote the creation of a climate of trust in the worker so that he does not fear possible disciplinary measures and therefore hides faults and customer complaints.

- The dissemination of the Quality Costs report is strictly internal and limited to a few positions in the organization.

Since, like the income statement and the balance sheet, the Quality Costs report contains confidential data about the company, it is convenient to limit its dissemination to those people who can approve or negotiate systematized correction or improvement actions. However, special reports of the costs of internal and external failures must be prepared so that they are known to all employees.

- The Quality Cost System cannot by itself reduce costs and / or improve Quality.

It is only a tool that allows Senior Management to know the magnitude of the cost problem, accurately determine the areas of opportunity and monetarily evaluate the results of the efforts in continuous Quality improvement.

3.2 Advantages of the proposed Quality Cost Calculation System.

1. Provides management with a tool to better manage the quality improvement process.

Once the information has been processed and quantified, through the Quality Cost System, the reports of the expenses are presented to the Directorate, so that it has a complete vision of what the lack of quality costs the organization. Said reports are made in the required frequency, to support the decisions of the Management and the implementation of the improvement actions.

2. Provides a tool to uniformly measure the results of each area and the impact of the improvements made.

When there is no Quality Cost System, each area frequently talks about quality in different terms, creating different reports and systems that are difficult to unify when Senior Management tries to know the global picture regarding Quality. It allows identifying all the expenses and improvement actions of the organization and integrating them into an administrative tool that analyzes them in a common term, the monetary value of the cost or savings. It also classifies the actions of the administration for Quality, in such a way that it facilitates requesting systematic information on expenses and savings. It allows to quantify monetarily the progress of each and every one of the improvement actions implemented in the organization, thereby facilitating a greater knowledge of the real performance of each area.

3. Provide a priority system for problems.

It hierarchizes the impact of expenses, highlights its relevance in terms of total amounts, in such a way that it facilitates Senior Management in making decisions and scheduling systematic actions for continuous improvement in order to reduce and / or eliminate expenses.

4. Ensures that the Quality objectives are together with the objectives and purposes of the organization.

Since the activities related to Quality are expressed monetarily. It allows planning both short and long term, together with the objectives and general purposes of the organization.

5. It improves the effective and efficient use of resources, provides the information that allows investing where the maximum benefits can be obtained, in addition to providing a measure of the improvements made.

The processed information allows us to detect the points in which it is convenient not to do something or stop applying certain improvement actions and invest those resources in other points that do need it to obtain the maximum benefits for the organization. Resources are allocated only where positive results, savings, quality improvements are expected, avoid making mistakes when allocating resources where it is not economically justified. It allows to know what the organization invests in each one of the Quality improvement actions, as well as if they offer the desired or expected efficiency, based on whether or not it obtains savings from its implementation.

6. Brings a fresh approach to getting the job done right every time.

Since it can be clearly identified what it costs the organization to produce or provide a defective quality service, it provides elements of strength and precision to economically substantiate the need to do the job well every time and allows calculating the savings obtained by working no rework or re-inspections.

7. Helps establish new processes.

By calculating losses when effective and efficient processes are not achieved, it provides the information necessary to determine the need to establish processes that ensure the necessary effectiveness and efficiency throughout the organization.

8. The reduction of Quality Costs is one of the best ways to increase the profits of an organization.

That is why it is proposed that Quality is a reserve of production (and services), since of course it is necessary for an organization to invest in Quality, it needs to control these expenses to ensure that they are minimal and to the same extent as decreases them, increases their benefits. Given that the price of a product or service is made up of the sum of cost and profit, if the organization manages to reduce its costs, at constant prices, it will unquestionably increase its profits or benefits, which it achieves without large investments in technology, or extensions of its capacity.

4. STEPS TO FOLLOW FOR THE IMPLEMENTATION OF A QUALITY COST SYSTEM.

Planning is the first task to perform to implement a Cost System in an organization, a schedule must be made in which the dates and sequence of each of the tasks that are detailed below must be defined:

Step 1: Create and train a Work Team to implement the Quality Cost System.

It is recommended to start by creating this working group since the financial reports from the Quality area are generally questioned, in addition to taking advantage of the roles established for both areas, the inconvenience that may arise at the beginning is to convince the financial area of the need to calculate Quality Costs.

Step 2: Select a Test Area:

It is recommended to establish selection criteria such as:

• Being an autonomous area, since it allows evaluating the impact of costs on sales.

• Have a good database on Costs.

• Direction open to new ideas and changes.

• Be an area that needs to improve Quality.

Step 3: Analysis of the key process diagram.

The working group together with the person in charge of the test area must carry out the analysis of the key processes of the department or selected area to determine the elements that will be included in the calculation of quality costs.

Step 4: Identify and classify cost elements.

It consists of identifying all the elements of the Quality Cost related to the test area, classifying them into Prevention, Evaluation, Internal Failures and External Failures. Through brainstorming and taking into account the analysis of the key processes, each member of the working group suggests the costs that they consider should be included in the Quality Cost System.

Step 5: Establishment of the elements of Inputs to the System and of the primary and statistical records.

Based on the classification made in the previous step, the elements to include are defined. It is recommended that to obtain the necessary information for the calculation of Quality Costs, models and reports that are already established in the organization are used, either as they are established or adding small changes and avoiding the creation of new models.

Step 6: Establish the Output Formats:

Performance Reports are designed that reflect the calculation of the Quality Costs classified in Prevention, Evaluation, Internal Failures and External Failures.

Step 7: Automating the system.

It is recommended to use computer techniques, such as spreadsheets in Excel.

Step 8: Begin the test period and set up the system.

For this, first of all, the period of time during which the test will be carried out must be limited, the improvement teams are formed and the team that analyzes the Quality Costs begins to function. Since it is a living process, based on the changes generated by practical experience, it is modified according to the expectations of the Client (Senior Management).

Step 9: Review of the Monthly Cost of Quality Report.

Monthly reports of quality and non-quality costs are issued and are reviewed in detail by the Board of Directors.

Step 10: Generalization of the Program to the rest of the areas.

When it is considered that all the issues related to the Quality Cost System have been foreseen, it is generalized to the entire organization, developing a strategy that takes into account the capacity of the Accounting area.

FINAL CONSIDERATIONS

1. The Quality Cost Calculation is not just another improvement project, it is the project that provides the Management with data to optimize the efforts of the Improvement Process.

2. With the calculation of Quality Costs, the progress of each and every other improvement project is quantified in monetary terms.

3. The Quality Cost Calculation allows prioritizing the areas of opportunities to obtain better levels of Quality.

4. The objective of a Quality Cost System is to implement an administrative decision tool that allows the Management to quantify monetarily and prioritize the expenses and the monetary impact of the progress of the Improvement Program that is implemented in the organization.

5. With the implementation of a Quality Cost system, the organization's efforts are optimized to achieve better Quality Levels that increase competitiveness and affirm its permanence in the market.

6. The Management must monitor both the behavior of quality costs, as well as Customer Satisfaction, to identify opportunities for improvement.

7. The implementation of a Quality Cost System in the organization is possible only if Senior Management is involved.

8. The work team in charge of the implementation of a Quality Cost System will be made up of both the Quality area and the Economy area.

BIBLIOGRAPHY:

- AMAT ORIOL and SOLDEVILA GARCIA PILAR: «Accounting and Cost Management», Editora Gestión 2000, Spain, 1997, Chapter 5.

- ARMENTEROS DIAZ MARTA: »Cost systems in Cuba, we must catch up

El Economista de Cuba Magazine, No. 9, ANEC, Cuba, 1999.

- SPANISH ASSOCIATION OF ACCOUNTING AND BUSINESS ADMINISTRATION: “Principles of Management Accounting. The cost system based on activities ”, Spain, October 1998.

- HORNGREN CHARLES: "Cost Accounting Concepts and applications for managerial decision making", USA, 1995.

- KAPLA ROBERT S and COOPER ROBIN: “Cost y Efecto” Editora Gestión 2000, Spain, 1999.

- KAPLA ROBERT S and NORTON DAVID P: “Balanced Scorecard” Editora Gestión 2000, Spain, 1997.

- LOPEZ RODRIGUEZ MIRIAM: “Management Control and Accounting, a proposal for Hotel Companies”, International Tourism Economy Event, Santiago de Cuba, 2000.

- SHANK JK and GOVINDARAJAN V.: «Gerencia Estratégica de Cosos», Editora Norma, Spain, 1995, Chapters 11 and 12.

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