Dana Wise, president of Tidwell Company, recently returned from a conference on quality and productivity. At the conference, he was told that many firms have quality costs totaling 20 to 30% of sales. The quality experts at the conference convinced him that a company could increase its profitability by improving quality. However, he was of the opinion that the quality of Tidwell Company was much less than 20% - probably more in the 4 to 6% range. However, because the potential for increasing profits was so great if he was wrong, he decided to request a preliminry estimate of the total quality costs currently being incurred. He asked his controller for a summary of quality costs, with the costs classified into four categories: prevention, appraisal, internal failure, or external failure. He also wanted the costs expressed as a percentage of both sales and profits. The controller had his staff assemble the following information from the past year, 20x1: a. Sales revenue, P37,240,000; net income, P4,000,000. b. During the year, customers returned 40,000 units needing repair. Repair costs averages P9 per unit. c. Twelve inspectors are employed, each earning an annual salary of P80,000. The inspectors are involved only with final inspection (product acceptance). d. Total scrap is 200,000 units. Of this total, ninety percent is quality related. The cost of scrap is about P10 per unit. e. Each year, approximately 800,000 units are rejected in final inspection. Of these units, seventy-five percent can be recovered through rework. The cost of rework is P1.80 per unit. f. A customer cancelled an order that would have increased profits by P600,000. The customer's reason for cancellation was poor product performance. g. The company employs 10 full-time employees in its complaint department. Each earns P48,600 a year. h. The company gave sales allowance totaling P180,000 due to substandard products being sent to the customer. i. The company requires all new employees to take its 4-hour quality training program. The estimated annual cost of the program is P120,000. 1. Prepare a simple quality cost report classifying costs by category. 2. Compute the quality cost-sales ratio. Also, compute the total quality costs with total profits. Should Dana be concerned with the level of quality costs? 3. Prepare a pie chart for the quality costs. Discuss the distribution of quality costs among the four categories. Are they properly distributed? Explain.
Dana Wise, president of Tidwell Company, recently returned from a conference on quality and productivity. At the conference, he was told that many firms have quality costs totaling 20 to 30% of sales. The quality experts at the conference convinced him that a company could increase its profitability by improving quality. However, he was of the opinion that the quality of Tidwell Company was much less than 20% - probably more in the 4 to 6% range. However, because the potential for increasing profits was so great if he was wrong, he decided to request a preliminry estimate of the total quality costs currently being incurred. He asked his controller for a summary of quality costs, with the costs classified into four categories: prevention, appraisal, internal failure, or external failure. He also wanted the costs expressed as a percentage of both sales and profits. The controller had his staff assemble the following information from the past year, 20x1:
a. Sales revenue, P37,240,000; net income, P4,000,000.
b. During the year, customers returned 40,000 units needing repair. Repair costs averages P9 per unit.
c. Twelve inspectors are employed, each earning an annual salary of P80,000. The inspectors are involved only with final inspection (product acceptance).
d. Total scrap is 200,000 units. Of this total, ninety percent is quality related. The cost of scrap is about P10 per unit.
e. Each year, approximately 800,000 units are rejected in final inspection. Of these units, seventy-five percent can be recovered through rework. The cost of rework is P1.80 per unit.
f. A customer cancelled an order that would have increased profits by P600,000. The customer's reason for cancellation was poor product performance.
g. The company employs 10 full-time employees in its complaint department. Each earns P48,600 a year.
h. The company gave sales allowance totaling P180,000 due to substandard products being sent to the customer.
i. The company requires all new employees to take its 4-hour quality training program. The estimated annual cost of the program is P120,000.
1. Prepare a simple quality cost report classifying costs by category.
2. Compute the quality cost-sales ratio. Also, compute the total quality costs with total profits. Should Dana be concerned with the level of quality costs?
3. Prepare a pie chart for the quality costs. Discuss the distribution of quality costs among the four categories. Are they properly distributed? Explain.
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