## **Learning Outcomes**

After reading this article, you will be able to explain the principles of Total Quality Management (TQM), recognise the role of Just-In-Time (JIT) systems in driving quality, and distinguish between prevention, appraisal, and failure costs for effective quality and environmental cost management. You will also identify key features, performance impacts, and challenges relevant to ACCA PM exam scenarios.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand how modern manufacturing approaches influence cost management and quality control. In particular, revision should focus on:

- The principles and practical application of Total Quality Management (TQM)
- The characteristics and requirements of Just-In-Time (JIT) production systems
- The distinction and significance of prevention, appraisal, and failure costs in quality management
- The impact of quality management on cost control, performance measurement, and behavioural factors
- The role of environmental management accounting and its link to quality initiatives

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which ONE of the following best describes a prevention cost in a manufacturing business?
   a) Cost of reworking defective products  
   b) Cost of employee quality training  
   c) Cost of inspecting finished goods  
   d) Cost of returned goods from customers

2. True or False? In a JIT environment, suppliers must consistently provide defect-free materials delivered on demand.

3. List the typical short-term effects of implementing TQM in an established production business.

4. Give a brief definition of 'internal failure cost' and provide an original example.

## **Introduction**

Quality is critical both to customer satisfaction and operational efficiency. Modern production and service environments require businesses to control not only their costs but also the quality and consistency of outputs. Two key approaches—Total Quality Management (TQM) and Just-In-Time (JIT) systems—have transformed expectations around quality and cost control. Success in the PM syllabus requires a strong understanding of how prevention, appraisal, and failure costs can be identified, measured, and managed, with increasing attention paid to environmental costs and impacts.

> **Key Term: Total Quality Management (TQM)**  
> An organisation-wide management approach focused on continuous improvement of processes, products, and services to meet or exceed customer expectations.
>
> **Key Term: Just-In-Time (JIT)**  
> A production and inventory system in which materials and products are supplied only when needed in the process, minimising stock levels and waste.
>
> **Key Term: Prevention Cost**  
> Expenditure on activities aimed at avoiding the occurrence of defects or failures in products or services.
>
> **Key Term: Appraisal Cost**  
> Costs incurred in measuring, inspecting, or monitoring products or services to detect defects before they reach customers.
>
> **Key Term: Failure Cost**  
> Costs arising from products or services failing to meet quality standards—includes both internal and external failure costs.
>
> **Key Term: Internal Failure Cost**  
> The cost of correcting defects identified before delivery to customers, such as scrap or rework.
>
> **Key Term: External Failure Cost**  
> The cost associated with defects discovered after delivery to customers, including returns, repairs, and reputation damage.
>
> **Key Term: Environmental Management Accounting (EMA)**  
> The identification, collection, and analysis of environmental cost information to support business decisions regarding environmental impacts.

## **Total Quality Management (TQM) and Modern Quality Approaches**

TQM rejects the idea that quality is only the concern of inspection or one department—quality is everyone’s responsibility. Implementing TQM means building quality into each process step, engaging all staff in continuous improvement, and seeking feedback from customers and suppliers to refine standards and reduce errors.

TQM impacts various areas of management accounting:

- Focuses on long-term cost savings, not just short-term budget reduction
- Requires new performance measures (e.g., defect rates, customer complaints)
- Demands investment in preventive activities, training, and improved supplier relationships

TQM should not be confused with a one-off quality campaign; it is a way of managing and requires persistent effort across all functions of the business.

> **Exam Warning**
> Many candidates refer to TQM as simply an inspection-based approach or overlook the importance of continuous improvement. Ensure your exam answers address the culture change and preventive orientation required by TQM.

## **Just-In-Time (JIT) Systems and Quality**

JIT aims to eliminate all forms of waste—including overproduction, waiting, transport, inventory, motion, over-processing, and defects. JIT systems can only succeed if suppliers deliver defect-free materials exactly when required. Defective deliveries or late shipments lead to immediate stoppages. This creates a strong incentive for both businesses and their suppliers to focus on prevention, not inspection.

JIT requires:

- Close partnership with reliable suppliers
- Production set up for rapid changeovers and flexibility
- Workforce trained in multiple skills and empowered to solve problems quickly

Performance measurement changes under JIT: traditional variance analysis may lose relevance as focus shifts towards quality, process efficiency, and delivery reliability.

## **Prevention, Appraisal, and Failure Costs in Quality Management**

It is important to categorise quality-related costs and direct management effort and budgets towards the areas that yield the greatest long-term savings and improvements.

### **Categories of Quality Costs:**

- **Prevention Costs:** Activities that stop defects before they occur (training, process redesign, supplier audits)
- **Appraisal Costs:** Checking product or service quality to catch errors (inspection, testing, audits)
- **Failure Costs:** Defects that slip past prevention or appraisal—split into:
  - **Internal failure costs:** Detected before reaching the customer (scrap, rework)
  - **External failure costs:** Found by customers (returns, warranty claims, lost sales)

A healthy quality system allocates sufficient resources to prevention and minimises costs spent on failures and inspection.

### **Worked Example 1.1**

A business spends \$8,000 on supervisor quality training, \$3,000 on end-of-line inspection, and \$2,500 reworking products caught before they leave the factory. Later, \$4,600 is spent honouring customer warranties on returned faulty items. Classify each cost and discuss which costs the business should try to reduce.

> **Answer:**
>
> \$8,000 = Prevention costs (training).
> \$3,000 = Appraisal costs (inspection).
> \$2,500 = Internal failure costs (rework).
> \$4,600 = External failure costs (warranty).
> In the short-term, rework and warranty costs should be minimised by strengthening prevention. The business should shift spending to activities that prevent errors occurring.

### **Worked Example 1.2**

A manufacturer using JIT finds that machine breakdowns lead to waiting time costs and missing customer delivery deadlines. It introduces a new supplier quality management programme costing \$12,000, which reduces breakdowns and reduces internal failure costs from \$14,000 per month to \$5,500. What type of costs are involved and how does this change help?

> **Answer:**
>
> Supplier quality programme = Prevention cost.
> Reduced breakdowns = Decrease in internal failure costs.
> By investing in prevention, the company sharply reduces failure costs, avoids missed deadlines, and supports JIT.

## **Environmental Management, Quality, and Cost Control**

Modern exam questions also emphasise managing costs connected to environmental impacts, not only quality failures. EMA tracks:

- Costs of waste and pollution (internal and external)
- Expenditure on prevention (e.g., cleaner production, recycling)
- Appraisal and detection activities (monitoring environmental compliance)
- Failure costs (e.g., fines, cleanup, lost reputation)

Good environmental management often overlaps with good quality management; investments made in prevention (such as cleaner processes or materials) reduce both environmental and quality-related failure costs.

> **Revision Tip**
> Many marks can be gained by correctly classifying costs as prevention, appraisal, internal failure, or external failure, and by explaining ways to shift spending from failures/appraisal towards prevention.

## **Summary**

TQM and JIT require businesses to refocus from inspection and correction to prevention and continuous improvement. Using the prevention–appraisal–failure cost framework enables businesses to justify investments in prevention activities which pay off through fewer defects, lower environmental risks, and reduced failure costs. These approaches are central both to cost management and to delivering levels of quality needed in competitive modern environments. Crucially, for the PM exam, be able to identify, describe, and apply these cost categories—and to explain their effect on performance and control.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The meaning and key principles of Total Quality Management (TQM)
- How Just-In-Time (JIT) systems drive quality and process improvements
- The definitions and distinctions between prevention, appraisal, and failure costs
- How to categorise quality-related and environmental management costs
- Why prevention costs are preferable to ongoing failure and appraisal costs
- The implications of quality and environmental management for performance measurement and control

## **Key Terms and Concepts**

- Total Quality Management (TQM)
- Just-In-Time (JIT)
- Prevention Cost
- Appraisal Cost
- Failure Cost
- Internal Failure Cost
- External Failure Cost
- Environmental Management Accounting (EMA)


Quality, JIT, and environmental management - Total quality management and prevention–appraisal–failure costs