The impact of process variation on unit manufacturing cost

The purpose of this study is to explore the impact of process variability on unit manufacturing cost. Hence, the engineering concept of variability is incorporated with the accounting literature relative to cost management in the new manufacturing environment. More specifically, the study seeks to determine whether selected activities that are thought to be cost drivers are relevant (statistically significant) in explaining variability in product quality within the context of a continuous-process manufacturing environment. The research setting is a manufacturing plant that produces paperboard in large reels; each reel is measured on critical quality characteristics according to predetermined engineering standards. The unacceptable sections within a reel are separated and classified as subquality production. The sample used in this study consists of 1096 reels from the production period June 4, 1989 through July 19, 1989. The outcome variable is a measure of the acceptable quality pounds within each reel expressed as a percentage of the total pounds per reel. An Analysis of Variance (ANOVA) model was used to test the differences among various crews, shifts, rest time between shifts, product grades, grade changes, shift changes, and machine downtimes. Additionally, a repeated measures ANOVA was employed to test the stability of the process across the span of an eight-hour shift. Finally, a methodology from the statistical quality control literature, the Shewhart Chart, was used to search for additional potentially relevant cost drivers, or sources of variability. This study found the differences in quality to be a function of crew and various interactions, length of break between shifts, incidence of downtime during a production run, and a shift change (during shift 1). These variables are all process-level cost drivers whose effects may not be associated with the cost of a specific product. This research shows the necessity of continuous improvement and the extent of the potential cost savings from improved manufacturing processes. This study calculates production costs by grade, a statistically significant product-level driver, and by grade change, a statistically significant batch-level driver. The financial consequences of grade diversity and grade change instabilities are evaluated in the context of an Activity-Based Cost system. Finally, the product costs suggested by this study are compared with the product costs from the manufacturer's cost system. The results suggest that when the effects of variability are considered in the product cost calculation, the cost of certain grades of product appear understated by the current accounting system. The understatement becomes apparent when the cost of lost contribution margin and the effects of cross-subsidizations resulting from variability in batch sizes are considered.