University:
Kentucky State University
Course:
ECO 301 | Microeconomics
Academic year:

2024
Views:

18

Pages:

6
Author:

scallywallyjiq

2-72 Learning Objective 10 (Appendix 2B) Prepare and interpret a quality cost report. . 2-73 Quality Cost Report For Years 1 and 2 Year 2 Amount Percent* Prevention costs: Systems development Quality training Supervision of prevention activities Quality improvement Total prevention cost $ 400,000 210,000 70,000 320,000 1,000,000 0.80% $ 0.42% 0.14% 0.64% 2.00% Year 1 Amount Percent* 270,000 130,000 40,000 210,000 650,000 0.54% 0.26% 0.08% 0.42% 1.30% Appraisal costs: Inspection Reliability testing Supervision of testing and inspection Depreciation of test equipment Total appraisal cost 600,000 580,000 120,000 200,000 1,500,000 1.20% 1.16% 0.24% 0.40% 3.00% 560,000 420,000 80,000 140,000 1,200,000 1.12% 0.84% 0.16% 0.28% 2.40% Internal failure costs: Net cost of scrap Rework labor and overhead Downtime due to defects in quality Disposal of defective products Total internal failure cost 900,000 1,430,000 170,000 500,000 3,000,000 1.80% 2.86% 0.34% 1.00% 6.00% 750,000 810,000 100,000 340,000 2,000,000 1.50% 1.62% 0.20% 0.68% 4.00% External failure costs: Warranty repairs Warranty replacements Allowances Cost of field servicing Total external failure cost Total quality cost 400,000 870,000 130,000 600,000 2,000,000 7,500,000 900,000 2,300,000 630,000 1,320,000 5,150,000 9,000,000 1.80% 4.60% 1.26% 2.64% 10.30% 18.00% $ * eA of total sales. In each year sales totaled $50,000,000. 0.80% 1.74% 0.26% 1.20% 4.00% 15.00% $ Quality cost reports provide an estimate of the financial consequences of the company’s current defect rate. . 2-74 Quality Cost Reports in Graphic Form $10 20 Quality Cost (in millions) 8 7 6 External Failure External Failure 5 Internal Failure 4 3 Internal Failure 2 1 0 Appraisal Appraisal Quality reports can also be prepared in graphic form. 18 Quality Cost as a Percentage of Sales 9 16 14 External Failure 12 10 Internal Failure 8 Internal Failure 6 4 Appraisal Appraisal 2 Prevention Prevention 1 2 External Failure 0 Prevention Prevention 1 2 Year Year . 2-75 Uses of Quality Cost Information Help managers see the financial significance of defects. Help managers identify the relative importance of the quality problems. Help managers see whether their quality costs are poorly distributed. . 2-76 Limitations of Quality Cost Information Simply measuring quality cost problems does not solve quality problems. Results usually lag behind quality improvement programs. The most important quality cost, lost sales, is often omitted from quality cost reports. . 2-77 ISO 9000 Standards ISO 9000 standards have become international measures of quality. To become ISO 9000 certified, a company must demonstrate: 1. A quality control system is in use, and the system clearly defines an expected level of quality. 2. The system is fully operational and is backed up with detailed documentation of quality control procedures. 3. The intended level of quality is being achieved on a sustained basis. .