Analyzing costs of qualityStella, Inc. is using, a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predeter—mined overhead allocation rates for each activity.RequirementsCalculate the predicted quality cost savings from the design engineering Work.Stella spent $103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement? PredictedReduction inActivity UnitsPredeterminedOverhead AllocationRete per UnitActivityInspection of incoming raw materialsInspection of finished goodsNumber of defective units discovered in-houseNumber of defective units discovered by customersLost profits due ta dissatisfied customers390193901,200325507275102

Answered: Predicted Reduction in Activity Units…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Analyzing costs of quality

Stella, Inc. is using, a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predeter—mined overhead allocation rates for each activity.

Requirements

Calculate the predicted quality cost savings from the design engineering Work.
Stella spent $103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

Predicted
Reduction in
Activity Units
Predetermined
Overhead Allocation
Rete per Unit
Activity
Inspection of incoming raw materials
Inspection of finished goods
Number of defective units discovered in-house
Number of defective units discovered by customers
Lost profits due ta dissatisfied customers
390
19
390
1,200
325
50
72
75
102

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