Abstract

Control charts, Pareto analysis, and Ishikawa diagrams are as applicable to studying variation in financial performance as in physical systems. These tools of quality support activity-based costing, which focuses on causes in the assignment of costs to processes. Early steps in the application of quality tools to financial measures include verifying that the measures accurately represent the processes and determining that the measures are systematic. Control charts provide evidence of systematic behavior or the lack of it. Then, it is necessary to identify the processes, products, or other entities that provide the best opportunities for improvement. Pareto analysis is the tool for ranking the candidate opportunities. Acting on the opportunities requires knowledge held by the process owners and others on the process action team. The improvements are tested, evaluated, and integrated in a plan-do-study-act cycle. A case study shows how quality tools support the financial measures of heart patient treatment in a large hospital. An Ishikawa diagram highlights causes of costs, and eventually a problem is uncovered in cost allocations related to X-Ray procedures. Fixing the problem produces a small but important cost savings.