Cost Accounting for Management

Tutorial 7 – Quality Costing

Tim Asisten Dosen

Problem 1

Explain the following information :

a. Cost of Quality
b. Control activities and Failure Activities
c. Prevention Cost
d. Appraisal Cost
e. Internal Failure Cost
f. External Failure Cost

Problem 2

During 2016 and 2017, Ricis Company reported sales of ¥18.000.000 for each year. Ricis listed
the following quality costs for the past two years. Assume that all changes in the quality costs are
due to a quality-improvement program.

  2016 2017
Field trials 450.000 900.000
Recalls 600.000 300.000
Re-inspection 300.000 150.000
Packaging inspection 180.000 120.000
Quality training 120.000 300.000
Process acceptance - 150.000
Retesting 435.000 105.000
Lost sales (estimated) 900.000 600.000
Product inspection 150.000 90.000
Complaint adjustment 465.000 285.000
TOTAL 3.600.000 3.000.000

Required:

1. Prepare a quality cost for each year (2016 and 2017)

2. How much were the additional resources invested in prevention and appraisal activities
(control costs) from one year to the next? What return did this investment generate?
(What reduction in failure costs was achieved?)
 3. The management of Ricis believes that it is possible to reduce quality costs to 5% of
sales. Assuming sales continue at the ¥18.000.000 level, calculate the additional profit
potential facing Ricis. Is the expectation of improving quality and reducing quality costs
to 5% of sales realistic? Explain briefly.
Problem 3
Taktuntuang Corps which operates automotive spare parts had sales of USD 50 million in
2015. Along 2016, sales had increased to USD 60 million. A quality-improvement program
was implemented in 2015 which has objective to increase the quality of products. The quality
costs for 2015 and 2016 as follow. Assume any changes in quality costs are attributable to
improvements in quality.

2015 2016
Sales 50,000,000 60,000,000
Costs:
Quality planning 400,000 600,000
Field inspection 300,000 -
Retesting 500,000 400,000
Plant expansion 1,200,000 600,000
Scrap 1,500,000 1,250,000
Order cost 300,000 350,000
Product acceptance 1,250,000 1,500,000
Warranty 3,000,000 2,500,000
Incoming materials inspection 250,000 500,000
Machine depreciation 6,500,000 7,200,000
Raw materials 15,000,000 18,000,000
Complaint adjustment 600,000 200,000
Rework 1,300,000 1,000,000
Return & allowances 650,000 500,000
New product review 100,000 100,000
Downtime (defective parts) 500,000 400,000
Design verification - 200,000
Product liability (defect) 850,000 600,000
Repairs 500,000 350,000
Quality training 300,000 700,000
Quality engineering - 400,000
Process control measurement - 300,000
Manufacturing overhead 4,000,000 5,300,000

Requires:
 1. Prepare a quality cost report for each year (2015 and 2016) by quality category. Give the
interpretation based on the result given.
2. Compute the relative distribution of quality costs by category for each year. Related to
control and failure cost, explain the distribution means
3. How the company can improve its quality but also reduce total quality costs? Consider
the strategy introduced by the American Society for Quality Control.

Homework

Dream Rider produces car seats for children from newborn to two years old. The company is
worried because one of its competitors has recently come under public scrutiny because of
product failure. Historically, Dream Rider’s only problem with its car seats was stitching in the
straps. The problem can usually be detected and repaired during an internal inspection. The cost
of the inspection is $4, and the repair cost is $0.75. All 250,000 car seats were inspected last year
and 9% were found to have problems with the stitching in the straps during the internal
inspection. Another 3% of the 250,000 car seats had problems with the stitching, but the internal
inspection did not discover them. Defective units that were sold and shipped to customers needed
to be shipped back to Dream Rider and repaired. Shipping costs are $7, and repair costs are
$0.75. However, the out-of-pocket costs (shipping and repair) are not the only costs of defects
not discovered in the internal inspection. For 20% of the external failures, negative word of
mouth will result in a loss of sales, lowering the following year’s profits by $300 for each of the
20% of units with external failures.

Required :

1. Calculate appraisal cost.

2. Calculate internal failure cost.

3. Calculate out-of-pocket external failure cost.

4. Determine the opportunity cost associated with the external failures.

5. What are the total costs of quality