Question

O’Deesha Company has the following information available:

Quality engineering of products                $20,000

Quality training of employees                     $2,000

Net cost of scrap                                        $30,000

Rework labor                                                $4,500

Warranty repairs                                     $100,000

Product recalls                                         $200,000

Liability arising from defective products $1,000,000

Maintenance of test equipment                 $44,000

Quality improvement projects                   $55,000

Setups for testing                                        $3,000

Supplies used in testing                              $5,500

Downtime caused by defects                     $70,000

Disposal of defective products                  $80,000

Required:

1. Describe four quality-related costs that O’Deesha might incur and tell how they are related. (10 marks)

2. Based on the four quality-related costs discussed a) above, prepare the quality cost report for the O’Deesha Company, using the information given. (15 marks)

Answer 1

Ans a.

Quality related costs or " Cost of Quality" is a concept given by Professor Joseph Juran. Quality related costs comprises of the " cost of ensuring and assuring quality" as well as costs incurred when quality is not achieved.

This includes the following costs:

1. Prevention Costs: Costs of quality planning, new product review, training, process planning, quality data and improvement projects.
2. Appraisal costs:Costs of incoming inspection, process inspection, finished goods inspection, quality laboratories and calibration of instruments.
3. Internal failure costs: Cost of scrap, rework,downgrading,downtime etc.
4. External failure costs: Costs of warranty, returned goods, customer complaints, allowances to customer for substandard quality products.

The costs are related to each other in a definite way. If we can invest wisely in cost of prevention then the other three costs can be controlled and decreased while ensuring better quality products , more customer satisfaction and enhanced goodwill for the company following the Quality concept.

Ans b.

Quality cost report for O’Deesha Company

Prevention Costs:

Quality engineering of products                $20,000

Quality training of employees                     $2,000

Quality improvement projects                   $55,000

Total Preventive Costs: $ 77,000

Appraisal Costs:

Maintenance of test equipment                 $44,000

Setups for testing                                        $3,000

Supplies used in testing                              $5,500

Total Appraisal Costs: $ 52,500

Internal failure Costs:

Net cost of scrap                                        $30,000

Rework labor                                                $4,500

Downtime caused by defects                     $70,000

Disposal of defective products                  $80,000

Total Internal failure Costs $ 184,500

External failure Costs:

Warranty repairs                                     $100,000

Product recalls                                         $200,000

Liability arising from defective products $1,000,000

Total External Failure Costs: $ 1,300,000

Hence we can note that if we can use technology and efficient process of quality control there will be slight increase in Preventive costs, but we can save huge amount of expenses incurred due to the external and internal failure costs arising out of faulty or defective products not conforming to the laid down quality standards resulting in product recalls, rework and loss of reputation as well.