Appendix 2B
Cost of Quality
Exercise 2B-1 (10 minutes)
1. Quality of conformance
2. Quality costs
Exercise 2B-2 (15 minutes)
1.
Prevention
Cost
Appraisal
Cost
Internal
Failure
Cost
External
Failure
Cost
a.
Product testing ……………….
X
b.
Product recalls ………………..
X
c.
Rework labor and overhead .
X
d.
Quality circles …………………
X
e.
Downtime caused by
defects ……………………….
X
f.
Cost of field servicing ……….
X
g.
Inspection of goods …………
X
h.
Quality engineering ………….
X
i.
Warranty repairs ……………..
X
j.
Statistical process control ….
X
k.
Net cost of scrap ……………..
X
l.
Depreciation of test
equipment …………………..
X
m.
Returns and allowances
arising from poor quality …
X
n.
Disposal of defective
products ……………………..
X
o.
Technical support to
suppliers ……………………..
X
p.
Systems development ………
X
q.
Warranty replacements …….
X
r.
Field testing at customer
site …………………………….
X
s.
Product design …………………
X
Problem 2B-3 (60 minutes)
1. An analysis of the company’s quality cost report is presented below:
Last Year
This Year
Amount
Percent*
Amount
Percent*
Prevention costs:
Machine maintenance …
$70
1.7
10.4
$ 120
2.5
20.3
Training suppliers ……..
0
0.0
0.0
10
0.2
1.7
Quality circles …………..
0
0.0
0.0
20
0.4
3.4
Total prevention costs …..
70
1.7
10.4
150
3.1
25.4
Appraisal costs:
Incoming inspection …..
20
0.5
3.0
40
0.8
6.8
Final testing ……………..
80
1.9
11.9
90
1.9
15.3
Total appraisal costs …….
100
2.4
14.9
130
2.7
22.0
Internal failure costs:
Rework ……………………
50
1.2
7.5
130
2.7
22.0
Scrap ……………………..
40
1.0
6.0
70
1.5
11.9
Total internal failure
costs ………………………
90
2.1
13.4
200
4.2
33.9
External failure costs:
Warranty repairs ……….
90
2.1
13.4
30
0.6
5.1
Customer returns ………
320
7.6
47.8
80
1.7
13.6
Total external failure
costs ………………………
410
9.8
61.2
110
2.3
18.6
Total quality cost …………
$670
16.0
100.0
$ 590
12.3
100.0
Total production cost ……
$4,200
$4,800
* Percentage figures may not add down due to rounding.
Problem 2B-3 (continued)
From the above analysis it would appear that Mercury, Inc.’s program has
been successful.
• Total quality costs have declined from 16.0% to 12.3% as a
to 3.1% and from 10.4% of total quality costs to 25.4%. The
$80,000 increase is more than offset by decreases in other quality
costs.
2. The initial effect of emphasizing prevention and appraisal was to reduce
external failure costs and increase internal failure costs. The increase in
3. To measure the cost of not implementing the quality program,
management could assume that sales and market share would continue
Problem 2B-4 (60 minutes)
1.
Florex Company
Quality Cost Report
Last Year
This Year
Amount
(in
thousands)
Percent
of Sales
Amount
(in
thousands)
Percent
of Sales
Prevention costs:
Quality engineering ……….
$ 420
0.56
$ 570
0.76
Systems development ……
480
0.64
750
1.00
Statistical process control .
0
0.00
180
0.24
Total prevention costs ……..
900
1.20
1,500
2.00
Appraisal costs
Inspection …………………..
750
1.00
900
1.20
Product testing …………….
810
1.08
1,200
1.60
Supplies used in testing….
30
0.04
60
0.08
Depreciation of testing
equipment ………………..
210
0.28
240
0.32
Total appraisal costs ……..
1,800
2.40
2,400
3.20
Internal failure costs:
Net cost of scrap ………….
630
0.84
1,125
1.50
Rework labor ……………….
1,050
1.40
1,500
2.00
Disposal of defective
products …………………..
720
0.96
975
1.30
Total internal failure costs …
2,400
3.20
3,600
4.80
External failure costs:
Cost of field servicing …….
1,200
1.60
900
1.20
Warranty repairs …………..
3,600
4.80
1,050
1.40
Product recalls ……………..
2,100
2.80
750
1.00
Total external failure costs ..
6,900
9.20
2,700
3.60
Total quality cost …………….
$12,000
16.00
$10,200
13.60
Problem 2B-4 (continued)
2.
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
Last Year This Year
Quality Costs (in thousands)
External Failure
Internal Failure
Appraisal
Prevention
Problem 2B-4 (continued)
3. The overall impact of the company’s increased emphasis on quality over
the past year has been positive in that total quality costs have
decreased from 16% of sales to 13.6% of sales. Despite this
improvement, the company still has a poor distribution of quality costs.
for the moment, these costs should decrease in time as better quality is