Activity Based Cost Management: An Effective Tool for Quality Performance Measurement in Manufacturing Industries

All industries world wide are facing intense competitions due to globalization and they are forced to adopt more flexible, integrated and highly automated methods for production in order to increase their productivity at reduced costs and with maximum customer satisfaction. This objective is to be achieved without any sacrifice in Quality, since the customer in this era is highly knowledgeable and ever demanding. Sustaining competitiveness is possible only when the processes and their associated costs are closely monitored, measured and analyzed for continual improvement. Cost of Quality (COQ) measurement and analysis is one of the most powerful management tools for ascertaining the performance of a firm. Different COQ models are there in practice worldwide. Since most of these COQ measurement methods are activity \ process oriented, the traditional accounting system is not fully supportive of an accurate cost calculation under these methods. Activity Based Costing is the alternative for overcoming the drawbacks of traditional cost accounting system. COQ approaches, integrated to ABC can be utilized as an effective tool for measurement of quality costs. This paper presents an application of Activity Based Cost Management of Cost of Quality in a manufacturing industry and compares the results with the traditional P-A-F model. The results highlight the weak points of traditional Cost of Quality model.