ACC 241 MANAGERIAL ACCOUNTING Study Guide Q&QA | Arizona State University

ACC 241 MANAGERIAL ACCOUNTING Study Guide Q&QA | Arizona State University Costs of Quality (COQ) As part of TQM, many companies prepare costs of quality reports. Costs of quality reports categorize and list the costs i ...

ACC 241 MANAGERIAL ACCOUNTING Study Guide Q&QA | Arizona State University Costs of Quality (COQ) As part of TQM, many companies prepare costs of quality reports. Costs of quality reports categorize and list the costs incurred by the company related to quality. Once managers know the extent of their costs of quality, they can start to identify ways for the company to improve quality while at the same time controlling costs. Quality-related costs generally fall into four different categories: prevention costs, appraisal costs, internal failure costs, and external failure costs. These categories form the framework for a costs of quality report. We’ll briefly describe each next. Prevention Costs Prevention costs are costs incurred to avoid producing poor-quality goods or services. Often, poor quality is caused by the variability of the production process or the complexity of the product design. To reduce the variability of the production process, companies often automate as much of the process as possible. Employee training can help decrease variability in nonautomated processes. In addition, reducing the complexity of the product design or manufacturing process can prevent the potential for error: The fewer parts or processes, the fewer things that can go wrong. Frequently, companies need to literally “go back to the drawing board” (the R&D and design stages of the value chain) to make a significant difference in preventing production problems. Appraisal Costs Appraisal costs are costs incurred to detect poor-quality goods or services. Intel incurs appraisal costs when it tests its products. One procedure, called burn-in, heats circuits to a high temperature. A circuit that fails the burn-in test is also likely to fail in customer use. Nissan tests 100% of the vehicles that roll off the assembly lines at its plant in Canton, Mississippi. Each vehicle is put through the paces on Nissan’s all-terrain test track. Any problems are identified before the vehicle leaves the plant. Internal Failure Costs Internal failure costs are costs incurred on defective units before delivery to customers. For example, if Nissan does identify a problem, the vehicle is reworked to eliminate the defect before it is allowed to leave the plant. In the worst-case scenario, a product may be so defective that it cannot be reworked and must be completely scrapped. In this case, the entire cost of manufacturing the defective unit, plus any disposal cost, would be an internal failure cost. External Failure Costs External failure costs are costs incurred because the defective goods or services are not detected until after delivery is made to customers. For example, Maytag had to recall 250,000 washing machines because water was leaking on the electrical connections, which had the potential to cause an electrical short and ignite the circuit boards.9 Along with incurring substantial cost for repairing or replacing these recalled washers, the publicity of a defect such as this could cause significant damage to the