Question

Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components of the $400,000 $240,000 is foed appraisal costs. The variable inspection cost is $0.20 per component it takes two components for each finished product. Internal fafure costs average 580 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked External fare costs average 200 per failed unt the company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventores. Seeking to decreases total cost of quality COQ Verizon contracted Quality is Free Consultants, Inc. to study ways to improve product quality and to reduce costs. Upon completion of the study. OFC recommended automatic inspection equipment that requires a $60.000 annual cost for training and S750.000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the feed appraisal cost reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by hat The company paid the consulting firm $100.000 in early January 2020 for the project Verzon expects no changes in its operating level in the foreseeable future. The $100.000 payment to the consulting from for Cost of Quality Coreporting purposes is best classified as an Multiple Choice o Prevention com Aprel cost Demarco

Answer 1

Let us first discuss all types of cost of quality:

1. Appraisal costs

These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They could include:

• Verification: Checking of incoming material, process setup, and products against agreed specifications
• Quality audits: Confirmation that the quality system is functioning correctly
• Quality engineering, Quality circles etc.
• Supplier rating: Assessment and approval of suppliers of products and services

2. Internal failure costs

Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer. They could include:

• Waste
• Scrap: Defective product or material that cannot be repaired, used, or sold
• Rework or rectification: Correction of defective material or errors
• Failure analysis: Activity required to establish the causes of internal product or service failure

3. External failure costs

External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include:

• Repairs and servicing after sales
• Warranty claims: Failed products that are replaced or services that are re-performed under a guarantee
• Complaints: All work and costs associated with handling and servicing customers’ complaints
• Product Returns: Handling and investigation of rejected or recalled products, including transport costs.

4. Prevention costs

Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and incurred before actual operation, and they could include:

• Product or service requirements: Establishment of specifications for incoming materials, processes, finished products, and services
• Quality planning: Creation of plans for quality, reliability, operations, production, and inspection
• Quality assurance: Creation and maintenance of the quality system
• Training: Development, preparation, and maintenance of programs

Analysis of the question: Here Verizon Mfg. co. is having internal as well as external failures cost in their existing operations on which they have to rework which was increasing their total cost of quality so after that they hired the services of QFC which will improve their product quality by providing proper training to avoid internal failure costs and it will also provide the services which will reduce the fixed appraisal cost which is a part of incoming inspection cost. so the services of QFC will improve the overall design, implementation, and maintenance of the quality management system.

Conclusion: The $1,00,000 payment to the consulting firm for Cost of Quality (COQ) should be best classified as Prevention Costs.