Question

Marlene Briggs, president of Shorts Company, was concerned with the trend in sales and profitability. The company had been losing customers at an alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the end of 2013, Marlene decided to begin a quality improvement program. As a first step, she identified the following in the accounting records as quality related, in addition to the sales revenue: Sales (400,000 units @ $100/unit) $40,000,000 Reinspection 1,200,000 Downtime (due to defects) 1,600,000 Vendor certification 480,000 Consumer complaints 800,000 Warranty claims 1,600,000 Test labor 1.200,000 V Inspection labor 1,000,000 120,000 Design reviews Required: Prepare a cost of quality report by quality cost category. (15 points)

Answer 1

MARIENE BRIGGS COST OF QUALITY REPORTS SL NO. PARTICULARS AMOUNT ($) AMOUNT ($). A) COST OF POOR QUALITY RE-INSPECTION WARRANTY TOTAL (COPQ) 1,200,000 1,600,000 2,800,000 B) COST OF GOOD QUALITY INCPECTION ( CERTIFICATION) TESTING PREVENTION COST (DESIGN ) STATISTICAAL PROCESS CONTROL DOWNTIME) INCPECTION LABOUR CONSUMER COMPLAIN (SPC) TOTAL COST OF GOOD QUALITY TOTAL COST OF GOOD QUALITY/ POOR QUALITY SALES PERCENTAGE OF QUALITY COST 480,000 1,200,000 120,000 1,600,000 1,000,000 800,000 5,200,000 8,000,000 40,000,000 20% A cost category is used to define two category i) Cost of Good Quality and ii ) Cost of Poor Category. Cost Of Quality Report = Cost of Poor Quality + Cost of Good Quality Many organizations, quality-related costs go as high as 15 to 20 percent of their sales revenue, with some of even going up to 40 percent of total operation. Here percentage of the above cost is 20%, it's a ideal cost that's normal cost out of total cost and assume within the budget