164 Chaprer 6

Exercises

Exercise I (Quality Cost Classilication)

Classify these following items into types ofcost ofquality:

a. Warranty repairs
. b. Scrap
c. Allowance granted due to blemish
d. Contribution margils of lost sales
e. Tuition for quality courses
f. Raw rnaterials inspections
g. Work-in-process inspection
h. Shipping cost for replacements
i. Recalls
j. Attomey's fee for unsuccessful defense ofcomplaints about quality
k. lnspection of reworks
l. Overtime caused by reworking
m. Machine rnainlenance
n. Tuning of testing equipment

f,xercise 2 (Cost of Quality Repoirt)

The Bali Company manufactures customdesigned milling machines and

incurred the following cost of quality in 20X3 and20X4:

20x4 20x3
Rework P200,000 P250,000
Quality manual 40,000 s0,000
Product des$n 300,000 270,000
Testing 80,000 60,000
Retesting 50,000 90,000
Product recalls 360,000 500,000
Field service 230,000 350,000
Disposal of defeclive units 90,000 85,000

The total sales in each ofthe two years were P6,000,000. The firm's cost of
goods sold is typically one-third ofthe net sales.
 Organizational lnnoyations ... 165

Reqtued:
l. Prepare a cost-of-quality report that classifies the firm's costs under the
proper cost-of-quality category.
2. Calculate the ratio ofeach cost-of{uality calegory to sales in each ofthe
two years. Comment on the fiends in cost of quality between 20X3 and
20x4.
3. Give three examples of nonfinancial measures that Bali might want to
monitor as part ofa total quality management effort.

Exercise 3 (Cost of Qualit"v Category)

The management of Boogie Cornpany thinks that its total cosr ofquality can
be reduced by increasing expenditures in certain key costs of quality
categories. The following costs of quality have been identified by
tnanagement:

Cost ol Qualiry Costt

Rework P 6,000
Recalls 15,000
Reengineering efforts 9,000
Repair 12,000
Replacements 12,000
Retesting 5,000
Supervision I E,000
Scrap 9,000
'Iraining t 5,000
Testing of incorning materials 7,000
lnspection olwort in process 1r,000
Dowrtime r0,000
Product liability insurance 9,000
Quality aldits s,000
Continuous improvement 1,000
Warranty repairs 15,000

Required:
I - C lassi ry thes€ costs into the four costs of quality categories.
2. Determine th€ total pesos being spent on each oflhe categories.
3. Based on the company's expenditures by cost of quality categories, on
which cost category should the company concentrate its effo(s to decreasc
its overall costs ofquality?
166 Chapter 6

Exercise 4 (Cost of Qudity Anelysis, Nonfinancial Quelity Meesuree)

Thc Cabriel Corporation msnufactures and sells indusrial grinders. Tho

following table presents financial information pertaining to quality in 20)t3
and 20X4 (in thousands):
20x4 20x3
Revenues P12,500 P10,000
Line inspection 85 110
&rap 200 2s0
Design engineering 240 100
Cost of retumed goods 145 60
Producttesting equipment 50 50
Customer support 30 40
Rerirork cosb 135 160
Preventive equipment maintenance 90 35
Product liability claims 100 200
lncoming materials inspection 40 20
Breakdown maintenance 40 00
Producftesling labor 75 220
Training 120 45
Waranty repair 200 300
Supplier evaluation 50 20

Required:
l. Classi$ the cost items in the table into prevention, appraisal, intemal
failure, or extemal failurc categories.
2. Calculate the ratio of each COQ categor,v to nevenues in 20X3 and 20X4.
Comment on the trends in costs of quality between 20X3 and20X4.
3. Give lwo examples of nonfinancial quality measures that Gabriel
Corporation could monitor as part ofa total quality-control effort.
 Orgonhational Intovaliotts.,. 167

Exercise 5 (Costs of Quallty Analysis, Nonfinanclel Qurlity Measurcs)

Canada Industries manufactures two types of refrigerators, Victoria and
Vancouver. Information on each refrigerator is as follows:

Victoie Vancouwr
Units manufaclured and soH 10,000 units 5,000 units
Selling pdce P2,000 P1,500
Vadable cosb per unit P1,200 P800
Hours spent on design 6,000 1,000
Tesling and inspeclion houB per unit t 0.5
Percentage of unib reuo*ed in plant 5o/o 10lo
Rercrk costs per refigerator Ps00 P400
Percenhge of unit mpaircd d customer site 4Yo 8%
Repair ccbper refri$rator m00 P450
Estimded losl sales from poor quality 300 unib

The labor rates per hour for various activities are as follows:
Design P75 per hour
Testing and inspection P40 per hour

Required:
l. Calculate the costs ofquality for Victoria and Vancouver, classified into
prevention, appraisal, internal failure, and external failure categories.
2. For each type of refrigerator, calculate the ratio of each COQ category as
a percentage ofrevenues. Compare and iomment on the oosts of quality
for Victoria and Vancouver.
3. Cive two examples of nonfinancial quality mcasures that Canada
Industries could monitor as part ofa total quality-control effort.
168 Chapter 6

Exercise 6 (Quality Improvement, Relev{nt Cost Analysis)

The Jimmy Corporation nranufactures and sells 3,000 premium quality

multimedia projectors at P12,000 per unit each year. At the current production
level, the firm's manulacturing costs include variable costs of P2,500 per unit
and annual fixed cost of P6,000,000. Additional selling, administrative, and
other expenses, not including l5 percent sales commissions. are Pl0;000,000
per year.

The new model, introduced a year ago, has experienced a flickering problem.
On average the flrm has to rework 40 perccnt ofthe complcted unils. The firm
still has to repaii [Link] i5 percent of the units shipped. The
additional work required for rework and repair makes it necessary for the firm
to add additional capacity with annual fixed cosrj of P I ,800,000. The variable .

costs per unit are P2,000 for rervork and P2,500, including transportation cosg
for repair.

The chief engineer, Ayen Anicete, has proposed a modified manufacturing

process that rvill almost entirely elirninate the flickering problem. The new
process will require PI2,000,000 for new equipment and itstallation, and
P3,000,000 for training. Anicete believes that currctrt appraisal costs of
P600,000 per year and P50 per unit can be eliminated within one year after the
installalion ofthe new proc€ss. Tlre firm currently inspects all the unifs before
shipment. Furthermore, warranty rcpair co$ willbc only p1,000 for no more
than 5 percent ofthe units shipped.

Jimmy believes that none of the fixed costs of rework or repair can be saved
and that a new model will be introduced in three years. The new technolory
will most likely render the current equipment obsolete.

The accountant estimates that repairs cost the lirm 20 percent of its business.

Required:
L What are the additionai costs of choosing tlre new process?
2. What are the benefits ofchoosing the new process?
3. Should Jimmy use the new proc€ss?
4. What factor should be considered before making the final decision?
5. A member of the board is very concerned about the substantial amount of
additional funds needed for the new process, Because the current model
will be replaced in the about three years, the board member suggests that
the firm should take no act;on and the problem will go away in three years.
Do you agree?
 anizotkmal lnnovations ... 169

Problems

Problem I
Anthony Foods manulactures food seasonings and packaged dry sauce
rnixes for sales in grocery stores. Anthony started a quality improvement
program in 20X3. It expanded its treining and quali! assurance programs
and began monitoring employee satisfaction and estimating lost sales due
to quelity problems. 'l'he data in the table below summarize the quarterly
results ofoperating its TQM program over the last two years.

Anthony Foods
Quality Costs
20x$20x4
(lrillions)

20x3 2ox4
01 02 Q3 04 Q1 02 Q3 04
Customer
comdaint dept. P3.90 P3.45 P3.03 P2.76 [Link] P2.27,P2.14 72.01
lnspection 1.,10 1.56 1.75 1.S5 2.39 2.96 3.63 4.46
Lost sales 49.20 40.31 33.11 28.42 24.45 21.08 19.20 17.44
Process
engineering 2.20 2.46 2.76 3.'11 3.87 4.86 6.13 7.58
fuality
assuran@
adminislration 6.20 6.52 6.86 7.19 7.93 8.74 9.61 10.53
Retums 26.90 21.09 16,35 13.53 11,32 9.50 8,43 7.52
Rework 15.80 II,DJ 10,03 8.49 6.16 5.56 5.00
Scrap 17,60 14,48 11.92 10.32 8.92 7.72 7.00 6.34
Testing 1.60 1.72 1.85 1.99 2.N 2:62 3.01 3.45
Training 13.10 14.39 15.90 17.46 21.12 25.50 30.37 36,35

Required:
a. Prepare a cost-of-quality report that classifies each expense as being in one
of four categories; appraisal, prevention, intemal failure, or external
failure.
b What conclusions can you draw from the data presented about Anthony
Foods' TQM program?
170 Chapter 6

Problem 2 (Applying TQM in Manufacturing versus Administration)

One large company that has been successful in applying Total euality
Management (TQM) principles in manufacturing reports that it has had less
success in applying the same techniques in improving administrative functions
such as order taking, distribution, and human resources. This company (which
has won several quality awards and has significantly improved its product
quality) used state-ot'-the-art TQM methods to train all of its employees in how
to apply l'QM. Florvever. the company has not been able to achieve the same
cost reductions and sen ice quality enhancements in administrative areas as it
has in the manufacturing area. Assuming that this phenomenon extends to
other companies. whv do you think that TQM works befier in manufacturing
than in nonmanufacturitr g/sen,ices areas?

Muhiple Choice

Intplementation of total quality management (TQNI) in a firm:

a. must follow a rigid, predetermined process to be successful.
h. involves some lower-level managers and all senior executives.
c. takes from 3-5 years.
d. is a bottoms up process! with senior managemeut involved only in
the final phase.

2 Goalpost quality conformance differs frotn absolute quality

confomance like:
a. "generally" d ifl'ers fnom "always."
b. "range" differ.s llom "point."
c. "probable" differs from "certain."
d. "many" diffbrs from "one."
3 The qualit-v cost of prevention is:
a. [Link] by the cost ofservicirrg warranties.
b. relers only to zero-detbct progratrs.
c. an upstream cost.
d. a downstream cost.

4 Typically, as prevention costs increase, other costs ofquality:

a. are nol affected.
b. change, but the direction cannot be predicted.
c. increase. but at a slower pacc.
d. decrease.
 Organizational lnnovations... l1l

5 Examples ofthe quality cost of prevention include all ofthe following,

except:
a. tuition for external training.
b. additional tolerance controls for machinery.
c. depreciation ofa training room.
d. an annual award for lowest rework rate.

6 Appraisal costs are incurred to measure and analyze data to test product
or service in conformity to specifications, but not to:
a. reduce error or prevent recurrence oferror.
b-. change procedures.
c, change policy.
d. check on quality standards.

7 The key differcnc(s) between internal failure cost and extemal failure
cost is (ar€):
a. when the cost happens.
b. where the cost happcns.
c. both when and where the cost happens.
d. whether the cost happens.

8 Which one of the following is not listed as a practice that successful

TQM firms use to ensurc having quality suppliers?
a. fonning long-term relalionships with suppliers as working
partnsrs.
b. sefting measures that truly rcfleci the needs and expectations of
suppliers.
c. reducing the supplier basc.
d. selecting suppliers based on price and their capability" and
willingness to improve quality, cost, delivery, flexibility, and for
their dedication to continuous improvement.

9 Conformance to a quality specification exprcssed as a speci{ied range

around a target is
a. endzoneconformance.
b. target conformance.
c. goalpostconformance.
d. absolute quality conformance.
172 ChaptbT 6

10. Conformancc that requires all products or services to meet exactly the
target value with no variation ailowed is
L endz-oncconformance.
b. target conformance.
c. goalpostconformance.
d. absolute quality conformance.

I l. Just-in-time purchasing requires

a. larger and less frequent purchase orders.
b. smaller and less frequent purchase orders.
c. smaller and more frcquent purchase orders.
d. larger and more frequent purchase orders.

12. A demand-pull'system in which edch component io a production line is.

prod-ucod
immedatcly as necded by tho next step in the production line
is referrcd to as
a. just-in-timepurchasing.
b. materiols requirements planning.
c. rslevant lotal costs.
d. economic order quantity.

13. AII ofthe following sre potential financial benefits ofjusrin time except
a. lower investments in idvcntories
b. lower investments in plant space for inventories.
c. reducing the risk ofobsolescence.
d, reducing manufacturing lead timc.
14. Cost quality reports usually do not consider
a. exlemal failure costs.
b. opportuhity cosls.
c. int€rnal failure costs.
d. appraisal costs.

15. Changing to an activity-based costingi managcment

rystem will not
a. change the way that resources are allocated.
b. change the way that costs are allocated.
c. change all the people'sjobs.
d. change the way that performance is evaluated.
 Orgonizational lnnoydtions ... 173

16. Rcsistancc to changing a m8nagement accounting end control systcm

(MACS) can occur for the reasons listed below, except
a. employees are set in their ways and will act dcfensively.
b. an employee's compensation and rcwards may bo altered.
c. the balance of power may shift unfavorably for the employee ,
d. employees have to wait for a vote ofshareholders before a MACS
can be changed.

17. One common mistake that ntanagers make when changing to a new cost
management system is
a. they involve too many in making the change.
b. they take too long to implement the change.
c. they over-budget for the cost ofthe change.
d. they try to change too many thiugs simultaneously.

lE. Thejust-in+ime manufacturing (JIT) system is slso caued the

a job in training system.
b job in lransit system.
c zero cost system
d zero i nventories system

19. The traditional focus in management accounting has been to develop

L only quantitative performance measures.
b. only qualitative performance measures.
c. both quantitative and qualitative performance measures.
d. neither quantitative nor qualitative measures.

20. A well-designed MACS develops and uses

a. both quantitative and qualiative information for control,
motivation and performance evaluqtion.
b- only quantitative information for control, motivation and
performance evaluation.
c. only qualitative information for control, motivation 8nd
performance evaluation.
d. neither quantitative nor qualitative information for control,
motivation, and performance cvaluation.
f 7.1 Chapt* 6

21. Product quality a d profitability are:

a. closoly related
b. inversely related
c. loosely related
d. indirectly linked

22. A product that meets or exceeds cuslomer expectation is:

a. the norm irr today's marketplace.
b. a quality product.
c. a result ofplanning for quality.
d. All ofthe above answers arc conect.

23. Core principles oftotal quality management include:

a. focusing on customer satisfaction.
b. striving on continuous improvement.
c. involvement ofthe entire work force.
d. Answer a" b and c are all core principles.

24. Contintrous improvement (Kaizen) in today's global economy:

a. is desirable ifa firm promotes quality.
b. is necessary ifa firm is to remain competitive.
c. Speaks only to the control ofdefects.
d- Is practically impossible.

25. lmplementation oftotal quality mar)agement (TQM) in a firm:

a. must follow a rigid, predetermined process to bc successful.
c. takes from 5-0 years
b. involves all lower-level managers and as well as senior executives
d. is a bottoms up proccss, with senior management involved only in
the final phase.

26. Coalpost quality conformance differs from absolute quality

conformance like:
a. "generally" differs from "always".
b. "range" differs from "point".
c. "probable'' differs from "certain".
d. "many" differs from "one".
 Organc ional lnnovations .-. 175

27. The Taguchi Qrality Loss Function domonstratas that es the quality
measurc ofa product declineq the loss due to quality defects:
a, increases as a qurdratic function.
b. increases in dirtct proportion.
c. incrrases in an inverse proportion.
d. decrease as a quadratic function.
28. The quality cost of prevention is;
a. exampled by the cost ofservicing warranties.
b. rcfers only to zeroJefect programs.
c. an upstr€arn cost.
d- a dolvnstrcam cost.

29. Typically, as prcvention costs increase, other costs ofquatity:

a. are not effectcd.
b. change, but the direction cannot be predicted.
c. increase, but at a slower pace.
d. decrease.

30. Examples ofthe quality cost ofprevention include all ofthe following
except:
a, tuition for extenlal training.
b. additional tolerance controls for machinery.
c. depreciation ofa training room.
d. an annual award for lowest rework rate.

3l Appraisal costs are incurred to mcasurs and analyze data to Gst ptoduct
or service conformity to specifications, but 7,ot to:
a. rcduce error or prevent recurrence of error.
b. change procedures.
c. change policy.
d. check on quality standards.

32. The key differencds) between intemal failure cost and external failure
cost is (are):
a. whcn the cost happens,
b. where tie cost happens.
c. both when and where the cost happens.
d. whcther the cost happens.
176 Chapter 5

33. If quality costs arc vicwed as conformancc versus non-conformanct,

quality expert Pbilip Crosby would argue that there is no such fting as
' a quality problem, but only a problem of;
a. dcsign.
b. materials.
c. labor.
d. All ofthe above.

34. If one were to classiry quality costs as prevention, appraisal, internal

failurc [Link] failure, the lowest and highest costs would tend to
be respectively:
a, appreisal and external failure.
b. appraisal and intemal failure,
c, prcvention and intemal failure.
d. prcvention and external failure.
35. Regardless ofthe differences in form and control, a common feature that
should be present in any Cost of Quality is that the report:
a. promotes total quality management (TQM).
b. stratifies costs by product line.
c. stratifies costs by department,
d. stratifies costs by plant.

36. Whichever of thc many helpful tools a finn chooses for idonti$ing
significant quality problems, the tool(s) will be most eflective if
&. managemcnt accountants are not involved in their selection.
b. management accountants take a pro-active role throughout the
process.
c. the firm hircs tachnical experts to choose the tool(s).
d. the firm leaves selection ofthe tool(s) to the supervison.

37. Which one ofthe following is nol a category of costs ofquality?

a. Promotion
b, extemal failure .

c. intornal ftilurc
d. Appaisal

38. Costs inourrod to keep quality defects fiom occurring are

a, extomal failurc costs.
b. appraisal costs.
c. intcrnal failure costs.
d. prcvention costs,
 Organizalional huovationn .., 177

39. Costs incurred in measurement and analysis of &t! to asccrtain

conformity of products and services to the spccifications are
a. external failure costs-
b. appraisal costs.
c. intemal failure cosb.
d. preventioo cosE.

40. Costs incurred as a rcsuh of poor quality found tlnough rppr8asEl prior
. !o delivery to customen;.re
a. external failur€ costs.
b. appraisal coss.
c. intemal failurc costs.
d. prevention cosb.

4l . Waranty costs would be classified as

a. prevention msts.
b. retention costs.
c. appraisal costs.
d. extemal failurc costs.

42, Rework costs would be classified as

a. prevention costs.
b. retention costs.
c. appraisal costs.
d. intemal failure cosb.

43. Test acquisition costs would be classified as

a. prevention cosE.
b. retention costs.
c. appraisal costs.
d. InternEl failwe costs.

U. Reinspection costs would be classified as

s. prevention costs.
b. retntion costs.
c. appraisal costs.
d. lnternal failure coss.
u8 6

45. Costs of meetings would be classified as

a. prevention costs.
b. retention costs.
c. appraisal costs.
d. internal failure costs.

46. Finished goods inspection costs would be classified as

a- lrevention cosB,
b. rct€ntion costs.
c. appraisal costs.
d- internal failure cosb.

47. Cost conformancc includcs

r. prevention costs erd appraisal costs.
b. intemal failure costs and €xternal failure costs,
c. prcvcntion cosls and intanel failurc costs,
d. appnisal co$s aod e{t€rnd failutt cos6,