Question

In response to intensive foreign competition, the management of Florex Company has attempted over the past year to improve the quality of its products. A statistical process control system has been installed and other steps have been taken to decrease the amount of warranty and other field costs, which have been trending upward over the past several years. Costs relating to quality and quality control over the last two years are given below. Year Costs in thousands) Last This Year 630 $ 918 $ 540 $ 720 495 1.080 $ 1.530 0 270 1 260 1.170 Inspection Quality engineering Depreciation of test equipment Rework labor Statistical process control Cost of field servicing Supplies used in testing Systems development Warranty repairs Netcost of scrap Product testing Product recalls Disposal of defective products 180 720 4 680 720 990 2610 900 $ $ $ 900 1.440 1.440 1.710 990 $ 1.080 Sales have been flat over the past few years, at $90,000,000 per year. A great deal of money has been spent in the effort to upgrade quality, and management is anxious to see whether or not the effort has been effective Required: 1. Prepare a quality cost report that contains data for both this year and last year. (Enter amount values in thousands Round your percentage answers to 2 decimal places (i.e 0.1234 should be entered as 12.34)

Answer 1

Cost category is explained below.

Prevention Cost: The costs incurred to avoid or minimize the number of defects at first place are known as prevention costs. Some examples of prevention costs are improvement of manufacturing processes, workers training, quality engineering, statistical process control etc.

Appraisal Cost: Appraisal costs are a specific category of quality control costs. Companies pay appraisal costs as part of the quality control process to ensure that their products and services meet customer expectations and regulatory requirements. These costs could include expenses for field tests and inspections.

Internal Failure Cost:  Internal failure costs are costs that are caused by products or services not meeting to requirements of the product standards and needs and are found post-production of products and services to external customers. ... Examples include the costs for: Rework, Increased scrap.

External Failure Cost:  A product failure that occurs when defects or problems are not detected before the product is delivered to the customer. External failures are the most difficult kind of failures to remedy, since damage may be done to the perceptions of the customer.

Florex Company
Quality Cost Report
	Last Year			This Year
	Amount (In Thousands)	Percent of Sales		Amount (In Thousands)	Percent of Sales
Sales		$ 90,00,000.00			$ 90,00,000.00
Prevention Cost
Quality Engineering	$               540.00	0.01		$                          720.00	0.01
Statistical Process Control	$                        -	-		$                          270.00	0.00
System Development cost	$               720.00	0.01		$                          900.00	0.01
Total Prevention Cost	$            1,260.00	0.01		$                      1,890.00	0.02
Appraisals Cost
Inspection Cost	$               630.00	0.01		$                          918.00	0.01
Depreciation of Testing Equipment	$               495.00	0.01		$                          180.00	0.00
Supplies used in testing	$                 45.00	0.00		$                            72.00	0.00
Product Testing	$               990.00	0.01		$                       1,710.00	0.02
Total Appraisals Cost	$            2,160.00	0.02		$                      2,880.00	0.03
Internal Failure Cost
Rework Labour	$            1,080.00	0.01		$                       1,530.00	0.02
Net Cost of scrap	$               720.00	0.01		$                       1,440.00	0.02
Product Recalls	$            2,610.00	0.03		$                          990.00	0.01
Disposals of defective Products	$               900.00	0.01		$                       1,080.00	0.01
Total Internal Failure Cost	$            5,310.00	0.06		$                      5,040.00	0.06
External Failure Cost
Cost of Field service	$            1,260.00	0.01		$                       1,170.00	0.01
Warranty repairs	$            4,680.00	0.05		$                       1,440.00	0.02
Total External Failure Cost	$            5,940.00	0.07		$                      2,610.00	0.03