Analyzing a Quality Cost Report
Bergen. Inc. produces telephone equipment at its Georgia plant. In recent years, the company's market share has been eroded by stiff competition from Asian and European competitors. Price and product quality arc the two key areas in which companies compete in this market.
Two years ago, Jerry Holman, Bergen's president, decided to devote more resources to improving product quality after learning that his company's products had been ranked fourth in quality in a survey of telephone equipment users. He believed that Bergen could no longer afford to ignore the importance of product quality. Holman set up a task force that he headed to implement a formal quality improvement program. Included on this task force were representatives from engineering. sales. customer service. production, and accounting. This broad representation was needed because Holman believed that this was a companywide program. and that all employees should share the responsibility for its success.
After the first meeting of the task force, Sheila Haynes. manager of sales. asked Tony Reese. production manager. what he thought of the proposed program. Reese replied. "I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I'm nervous about having my annual bonus based on a decrease in quality costs: there are too many variables that we have no control over."
Bergen's quality improvement program has now been in operation for two years. The company's most recent quality cost report is shown below.
Bergen, Inc. Quality Cost Report (in thousands) | ||
| Year 1 | Year 2 |
Prevention costs: |
|
|
Machine maintenance | $ 215 | $ 160 |
Training suppliers | 5 | 15 |
Design reviews | 20 | 95 |
Total prevention cost | 240 | 270 |
Appraisal costs: |
|
|
lncoming inspection | 45 | 22 |
Final testing | 160 | 94 |
Total appraisal cost | 205 | 116 |
Internal failure costs: |
|
|
Rework | 120 | 62 |
Scrap | 68 | 40 |
Total internal failure cost | 188 | 102 |
External failure costs: |
|
|
Warranty repairs | 69 | 40 |
Customer returns | 262 | 80 |
Total external failure cost | 331 | 103 |
Total quality cost | $ 964 | $ 591 |
Total production cost | $ 4,120 | $4,510 |
As they were reviewing the report, Haynes asked Reese what he now thought of the quality improvement program. “The work is really moving through the production department,” Reese replied. “We used to spend time helping the customer service department solve their problems, but they are leaving us alone these days. I have no complaints so far. and I'm relieved to see that the new quality improvement hasn't adversely affected our bonuses. I'm anxious to see if it increases our bonuses in the future.”
Required:
1. By analyzing the company's quality cost report, determine if Bergen, Inc.'s quality improvement program has been successful. List specific evidenceto supportyour answer Show percentage figures in two ways: first, as a percentage of total production cost; and second, as a percentage of total quality cost. Carry all computations to one decimal place.
2. Discuss why Tony Reese's current reaction to the quality improvement program is more favorable than his initial reaction.
3. Jerry Holman believed that the quality improvement program was essential and that Bergen, Inc., could no longer afford to ignore the importance of product quality. Discuss how Bergen, Inc., could measure the opportunity cost of not implementing the quality improvement program.
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