You have recently joined the Management Accounting Department and have been assigned the task of preparing a report. The objective of the report is…

A deeper analysis of the company's quality cost structure, when viewed alongside the operational issues highlighted by the Production, Marketing, and HR departments, reveals that the organisation is trapped in a cycle of reactive problem-solving rather than proactive quality management. The extremely high share of non-conformance costs i.e., 84% of the total quality costs reflects inefficiencies in the production system. The buildup of outdated finished fittings, and discontinued stainless-steel components indicates weak design control, poor coordination between production and marketing, and ineffective inventory and product lifecycle management. Machine breakdowns and employee turnover have further aggravated the situation, leading to frequent rework, excessive downtime, and poor adherence to production targets. These operational weaknesses are directly visible in the data, where rework and downtime alone account for 39% of total quality costs, while warranty claims and customer-related failures constitute another 45%. Marketing's report of delayed deliveries, quality complaints, and rising competition reinforces that the organisation is losing its market position because its internal systems are not robust enough to support consistent product quality. The low proportion of conformance costs, only 16%, suggests that preventive and appraisal activities are not receiving adequate attention. Despite recent HR improvements and the introduction of ESOPs, the underlying manufacturing systems remain outdated, with insufficient investment in preventive maintenance, supplier quality assurance, employee training, and design upgrades. The heavy dependence on outdated equipment, outdated product designs, and insufficient inspection mechanisms is creating systematic quality issues, resulting in rising returns, dissatisfied customers, and increasing market pressure from competitors offering superior quality at lower prices. The data strongly signals that unless the company shifts its focus from curing defects to preventing them, the profitability and reputation of the business will continue to deteriorate. To resolve these deep-rooted inefficiencies, the company should prioritise the adoption of Total Productive Maintenance (TPM) and Total Quality Management (TQM) as strategic interventions rather than mere operational tools. TPM will help stabilise the production environment by reducing breakdowns, improving equipment availability, and strengthening the reliability of manufacturing processes. By embedding autonomous maintenance practices and structured preventive maintenance schedules, the company can significantly reduce rework, scrap, and downtime, currently the largest contributors to internal failure costs. In parallel, the adoption of TQM is essential to address systemic weaknesses in design control, supplier management, employee involvement, and customer-focused quality. TQM will enable the organisation to establish a culture where processes are designed to avoid defects rather than detect them, ensuring that outdated fittings, obsolete designs, and poor-quality components do not enter the production process in the first place. Together, TPM and TQM create a balanced approach that strengthens both process efficiency and product quality. This integrated strategy will gradually shift the company's cost profile toward prevention and appraisal while compressing the disproportionately high failure costs. Over time, this will reduce customer complaints, improve delivery performance, enhance brand perception, and restore competitive advantage. Ultimately, the company must move from a reactive posture to a proactive, system-driven quality culture if it aims to improve operational efficiency, reduce costs, and sustain long-term growth. Alternative Presentation Statement Showing "Total Quality Cost" Particulars of Costs ₹ % of Total Costs of Quality Prevention Costs Quality training and audits 10,00,000 3.33% Preventive maintenance of equipment 20,00,000 6.67% Total (A) 30,00,000 10.00% Appraisal Costs Inspection of incoming materials and equipment testing 18,00,000 6.00% Total (B) 18,00,000 6.00% Cost of Conformance (A) + (B) 48,00,000 16.00% Internal Failure Costs Rework and production downtime 1,17,00,000 39.00% Total (C) 1,17,00,000 39.00% External Failure Costs Warranty claims and addressing customer complaints 1,35,00,000 45.00% Total (D) 1,35,00,000 45.00% Cost of Non-Conformance (C) + (D) 2,52,00,000 84.00% Total Quality Costs (A) + (B) + (C) + (D) 3,00,00,000 100.00% The reporting of quality costs highlights the cost of quality activities at XYZ. The total quality costs statement clearly displays the relationship between conformance costs (prevention and appraisal costs) and non-conformance costs (internal failure and external failure costs) and the drivers of a reduction in the overall spending on quality. Statement indicates that only 10.00% of the total quality cost is the cost of preventing quality problems while 6.00% is the cost of appraisal activities. Thus, prevention and appraisal costs make up only 16.00% of total quality costs. In contrast, 84.00% of quality control costs are incurred for internal and external failure costs. Recommendation Following two measures can be used to reduce non- conformance cost: Total Productive Maintenance (TPM) is a system of maintaining and improving the integrity of production and quality system through keeping all equipment in top working condition so as to avoid breakdowns and delays in manufacturing processes. It involves identifying machines in every division (including planning, manufacturing, maintenance) and then planning & executing a maintenance programme covering their entire useful life. In this scenario, TPM will help in reducing internal failure cost (i.e. rework and production downtime), which constitutes 39.00% of total quality cost, by keeping all equipment in good working conditions so that there is no downtime or machine breakdown and ensuring that all equipment run smoothly. If machines work properly, the chances of rework will reduce, ultimately will also reduce chances of warranty claims and customer complaints (comprising 45.00% of total quality cost which is the major part of total quality cost). Total Quality Management (TQM) aims at improving the quality of organisational output, including goods and services, through continual improvement of internal practices. Its objective is to eradicate waste and increase efficiency without compromising with the quality. It requires that company maintain this quality standards in all aspects of business by ensuring that things are done right the first time so that defects and waste are eliminated from operation. It appears that XYZ is not a TQM company at present due to huge disparity between conformance costs and non-conformance costs. In order to make XYZ to be successful, all staff at XYZ must be engaged in the improvement process and share in the continuous improvement ethos. In order to establish a reputation as a high- quality product manufacturer XYZ must ensure staff are focused on quality and attitudes changed toward the importance of conformance activities, for instance, XYZ can conduct third party inspection of raw material at supplier's workplace leading to maintenances of quality standards. Overall, while applying above two measures, in the XYZ, consideration must therefore be given to the optimum balance between the costs of conformance and the costs of non-conformance.