Tutorial 3 Quality Costing Solutions

Dr Hadiza Said

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Cost of quality analysis

What does prevention, appraisal, internal failure and external failure means?

Rearrange the costs based on the above categories

Quality Costing

Quality Costs

Prevention

Costs

Appraisal

Costs

Internal

Failure

Costs

External

Failure

Costs

Costs incurred

inspecting

products to

make sure they

meet both

internal and

external

customers

requirements

Costs incurred

when a defect is

discovered

before being sent

to the customer

Costs incurred

when a

customer

receives a

defective

product

Costs incurred

to eliminate

defective units

before they

are produced

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Quality Costing (contd)

Prevention costs - quality engineering, quality training, statistical process control, supplier certification, research of customer needs

Appraisal costs - inspection/testing of incoming materials, maintenance of test equipment, process-control monitoring, product quality audits.

Internal-failure cost - defects, waste, net cost of scrap, rework costs

External-failure costs - Product liability lawsuit, repair costs in the field, product liability recalls, service calls, warranty claims

4

5

Prevention costs

Design engineering

Preventive maintenance

Training

Supplier evaluations

Total prevention costs

Appraisal costs

Line inspection

Product-testing equipment

Incoming materials inspection

Product-testing labour

Total appraisal costs

Internal failure costs

Scrap

Rework

Breakdown maintenance

Total internal failure costs

External failure costs

Returned goods

Customer support

Product liability claims

Warranty repair

Total external failure costs

Total costs of quality

240,000

90,000

120,000

50,000

500,000

85,000

50,000

40,000

75,000

250,000

200,000

135,000

40,000

375,000

145,000

30,000

100,000

200,000

475,000

1,600,000

4.0%

2.0%

3%

3.8%

12.8%

100,000

35,000

45,000

20,000

200,000

110,000

50,000

20,000

220,000

400,000

250,000

160,000

90,000

500,000

60,000

40,000

200,000

300,000

600,000

1,700,000

2.0%

4.0%

5.0%

6.0%

17.0%

1 and 2 2012 2011

Sales 12,500,000 10,000,000

Costs of quality

Cost

(1)

Percentage

of sales

(2) = (1)

12,500,000

Cost

(3)

Percentage

of sales

(4) = (3)

10,000,000

20.16 Costs of quality analysis, non-financial quality measures

Comments

Between 2011 and 2012, Alcazarquivirs costs of quality have declined from 17% of sales to 12.8% .

The analysis of individual costs of quality categories indicates that Alcazarquivir began allocating more resources to prevention activities

design engineering, preventive maintenance, training and supplier evaluations in 2012 relative to 2011. As a result, appraisal costs declined from 4% of sales to 2%, costs of internal failure fell from 5% of sales to 2.8% and external failure costs decreased from 6% of sales to 3.8%.

Examples of non-financial quality measures that Alcazarquivir could monitor are:

I. Number of defective grinders shipped to customers as a percentage of total units of grinders shipped.

II. Ratio of good output to total output at each production process.

III. Employee turnover.

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Hull Ltd Solutions

a) Percentage of sales

Costs

Prevention

Costs

Quality training

Workshop 1,200 0.3 4,800 0.9 9,800 1.6

Process improve

-ment project 1,800 0.4 5,900 1.1 10,900 1.8

Auditing the

quality system 2,400 0.5 6,200 1.2 9,100 1.5

Total 5,400 1.2 16,900 3.2 29,800 4.9

Appraisal

Costs

Clarifying customer

Expectation 3,200 0.7 8,600 1.7 10,900 1.8

Proof reading 11,500 2.5 16,400 3.2 19,200 3.2

Inspecting by

quality control 4,300 0.9 11,800 2.3 13,700 2.3

Total 19,000 4.1 36,800 7.2 29,800 7.3

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Internal failure

Costs

Press downtime 12,500 2.7 8,900 1.7 5,500 0.9

Correction of typos 10,400 2.3 9,200 1.8 6,700 1.1

Bindery waste 6,300 1.4 3,500 0.7 2,100 0.7

Total 29,200 6.4 21,600 4.2 14,300 2.7

External failure Costs

Responding to complaints 11,200 2.4 6,600 1.27 4,500 0.7

Investigating claims 11,600 2.5 6,600 1.27 3,900 0.6

Lost sales 23,500 5.1 10,900 2.1 2,900 0.4

Total 46,300 10.0 24,100 4.6 11,300 1.7

Grand total 99,900 99,400 99,200

Sales revenue 460,400 517,700 597,600

Ratio of cost/sales 21.7% 19.2% 16.6%

a). Percentage of sales (cont.)

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Cost category First Second Third

Qtr Qtr Qtr

Prevention

Costs

Quality training

Workshop 1,200 4,800 9,800

Process improve

-ment project 1,800 5,900 10,900

Auditing the

quality system 2,400 6,200 9,100

Total 5,400 16,900 29,800

Appraisal

Costs

Clarifying customer

Expectation 3,200 8,600 10,900

Proof reading 11,500 16,400 19,200

Inspecting by

quality control 4,300 11,800 13,700

Total 19,000 36,800 29,800 |

% % %

5% 17%30%

19%37%

44%

a) Another method; Percentage of total quality cost

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Internal failure

Costs

Press downtime 12,500 8,900 5,500

Correction of typos 10,400 9,200 6,700

Bindery waste 6,300 3,500 2,100

Total 29,200 21,600 14,300

External failure Costs

Responding to complaints 11,200 6,600 4,500

Investigating claims 11,600 6,600 3,900

Lost sales 23,500 10,900 2,900

Total 46,300 24,100 11,300

Grand total 99,900 99,400 99,200

Sales revenue 460,400 517,700 597,600

Ratio of cost/sales 21.7% 19.2% 16.6%

22%29% 14%

46% 24% 11%

a) Another method; Percentage of total quality cost (cont.)

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a) Interpretation (comparison

between the quarters) First quarter emphasis was more on fixing

rather than preventing quality problems.

Over-emphasis on correcting rather than preventing is an expensive way of having quality

Shifts of emphasis over the quarters to prevention

Both theory and practice tend to demonstrate that quality costs are highest when prevention costs are lowest

Percentage to sales ratio decline over quarters

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b). Explain why management

might need accounting for

quality Understanding the types and causes of quality costs can help

managers prioritise improvement projects and provide

feedback to supports and justifies improvement efforts

Management accounting provides information for planning, decision making and control

Cost accounting has been criticised as not being adequate for promoting quality improvement

Traditional cost accounting systems reports quality cost through the use of standards for raw materials, direct labour and overhead.

The costs of internal failure are normally indirectly measured through a set of variances, while prevention and appraisal costs are usually budgeted and allocated as part of overhead.

There is no detailed information to monitor all the elements of quality costs in traditional costing systems.

Standards are considered optimal, there is little scope for encouraging quality reporting systems that show detailed budgeted and actual figures for prevention, appraisal, internal failure and external failure.

Discover what causes failures and adjust prevention activities to close the gaps that allowed the failures to occur. The aim is to achieve zero-defects, maximum value, and maximum customer satisfaction.

The cost of quality report helps monitor operational performance and identify bottlenecks and other inefficiencies.

Any relevant point

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b). Explain why management might need

accounting for quality

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c). Recommendation

The cost of quality only contains indirect measures of quality and, therefore, the operational performance report should also include direct measures (e.g. number of defective units; quantity of waste, etc.)

Link rewards to the cost of quality performance

Extend the quality training programmes as this preventive action seems to have produced positive results in the second and third quarters.

Emphasise the continuous improvement principle not one-off results.

Encourage employees to submit suggestions for improvements

Any relevant point