ACCT 215 Problems Solutions, Fall 2011

Chapter 02B Cost of Quality Appendix 02B Cost of Quality Exercise 2B-1 (10 minutes) 1. Quality of conformance 2. Quality of conformance 3. Prevention costs, appraisal costs 4. Internal failure costs, external failure costs 5. External failure costs 6. Appraisal costs 7. Prevention costs 8. Internal failure costs 9. External failure costs 10. Prevention costs, appraisal costs 11. Quality circles 12. Quality cost report 2B-1 Chapter 02B Cost of Quality Problem 2B-3 (60 minutes) 1. Yedder Enterprises Quality Cost Report (in thousands of dollars) Last Year This Year Amount (000s) Percent of Sales Amount (000s) Percent of Sales Prevention costs: Systems development............. $    120 0.13 % $    680 0.68 % Statistical process control — 0.00 % 270 0.27 % Quality engineering.................       1,080 1.14 % 1,650 1.65 % Total prevention cost..................       1,200 1.27 % 2,600 2.60 % Appraisal costs: Inspection................................. 1,700 1.79 % 2,770 2.77 % Supplies used in testing.......... 30 0.03 % 40 0.04 % Cost of testing equipment 270 0.28 % 390 0.39 % Total appraisal cost.....................       2,000 2.10 % 3,200 3.20 % Internal failure costs: Net cost of scrap...................... 800 0.84 % 1,300 1.30 % Rework labor............................. 1,400 1.47 % 1,600 1.60 % Downtime due to quality problems................................             600 0.63 % 1,100 1.10 % Total internal failure cost...........       2,800 2.94 % 4,000 4.00 % External failure costs: 2B-2 Chapter 02B Cost of Quality Product recalls.......................... 3,500 3.68 % 600 0.60 % Warranty repairs...................... 3,300 3.47 % 2,800 2.80 % Customer returns of defective goods.....................       3,200 3.37 % 200 0.20 % Total external failure cost..........   10,000 10.52 % 3,600 3.60 % Total quality cost......................... $16,000 16.84 % $13,400 13.40 % Problem 2B-3 (continued) 2. 2B-3 Chapter 02B Cost of Quality 2B-4 Chapter 02B Cost of Quality Problem 2B-3 (continued) 3. During the past year the company has more than doubled its spending on prevention and it has increased its spending on appraisal activities by 60%. This increased emphasis on prevention and appraisal has resulted in a decline of total quality costs from 16.84% of sales last year to 13.4% of sales this year. While the situation has improved, internal and external failure costs still constitute the majority of the quality costs—and this does not include the lost sales due to customer perceptions of poor quality. However, if the company continues to emphasize prevention and appraisal, the internal and external failure costs should further decline until they are no longer dominant. 2B-5 Chapter 02B Cost of Quality Probably due to the increased emphasis on appraisal activities, internal failure costs have actually increased. This is because the increased appraisal activities catch more defects before they are shipped to customers. Thus, the company is incurring more costs for scrap and rework, but it is saving large amounts on external failure costs as a consequence of not releasing defective goods to customers. As better quality is built into products and better defect prevention systems are developed, defects should decrease and appraisal and internal failure costs should also fall. 2B-6