(Cost of quality) Tanks a Lot Ltd. is very aware that its scuba diving tanks must be of high quality to maintain its reputation of excellence and safety. You have been retained as a consultant by the company and have suggested that quantifying the costs of quality would be important to an understanding of and management of quality. Your experience as a cost accountant helped you determine the following year 2000 costs of quality from the company’s accountingrecords:
|
Prevention Costs |
|
|
Foolproofing machinery |
$10,000 |
|
Quality training |
30,000 |
|
Educating suppliers |
22,000 |
|
Appraisal Costs |
|
|
Quality inspections |
$12,000 |
|
Recording defects |
9,000 |
|
Procedure verifications |
6,000 |
|
Internal Failure Costs |
|
|
Waste disposal |
$ 4,500 |
|
Unplanned downtime |
1,400 |
|
External Failure Costs |
|
|
Warranty handling |
$ 6,400 |
|
Customer reimbursements/returns |
5,100 |
You also determined that 1,200 of the 100,000 tanks made in 2000 had to be sold as scrap for $70 less profit per tank than the nondefective tanks. Tanksa Lot also incurred $4,000 of rework costs that had been buried in overhead (in addition to the failure costs presented above) in producing the tanks sold at the regular price.
a. Tanks a Lot management has asked you to determine the year 2000 “costs” of the following:
1. Lost profits from scrapping the 1,200 units
2. Total failure costs
3. Total quality costs
b. Assume that the company is considering expanding its existing full 2 year warranty to a full 3 year warranty in 2001. How would such a change be reflected in quality costs?