Chapter 1.A, Problem 4P

PROBLEM 1A−4 Quality Cost Report LO1−7, LO1−8

page 66

In response to intensive foreign competition, the management of Florex Company has attempted over the past year to improve the quality of its products. A statistical process control system has been installed and other steps have been taken to decrease the amount of warranty and other field costs, which have been trending upward over the past several years. Costs relating to quality and quality control over the last two years (in thousands) are given below:

	Costs (in thousands)
	Last Year	This Year
Inspection	$750	$900
Quality engineering	$420	$570
Depreciation of test equipment	$210	$240
Rework labor	$1050	$1500
Statistical process control	$0	$180
Cost of field servicing	$1200	$900
Supplies used in testing	$30	$60
Systems development	$480	$750
Warranty repairs	$3600	$1050
Net cost of scrap	$630	$1125
Product testing	$810	$1,200
Product recalls	$2,100	$750
Disposal of defective products	$720	$975

Sales have been flat over the past few years, at $75,000,000 per year. A great deal of money has been spent in the effort to upgrade quality, and management is anxious to see whether or not the effort has been effective.

Required:

1. Prepare a quality cost report that contains data for both this year and last year. Carry percentage computations to two decimal places.
2. Prepare a bar graph showing the distribution of the various quality costs by category.
3. Prepare a written evaluation to accompany the reports you have prepared in (1) and (2) above. This evaluation should discuss the distribution of quality costs in the company, changes in this distribution that you see taking place, the reasons for changes in costs in the various categories, and any other information that would be of value to management.