Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 25

Assigning Responsibility

Wallace Manufacturing produces engine parts for auto manufacturers. Recently, one of the major auto firms rejected a load of manifolds as being defective. Wallace’s purchasing department had ordered from a new supplier with a much lower price. Unfortunately, the quality was much lower as well. Now the company must produce replacement parts, and the customer will not reimburse Wallace for the original cost.

?The manufacturing manager argues that the purchasing department should bear all of the cost of the additional production. The purchasing department manager says that the manufacturing department should have checked the quality of the material when it was delivered.

Required

As the plant manager, how would you assign responsibility?

Step 1 of 2

Fundamentals of Variance Analysis; Responsibility Assignment

The major responsibility in this regard is of the purchasing department. The purchase manager while framing the purchase order should have been very specific about the quality that the department should have. There is every possibility that purchasing department may have faltered on this account. The situation seems to be more like of cost cutting done at the cost of quality . Hence the primary responsibility is of the manager purchase. However we also need to be looking into the context in which these managers operate. Say for example, if there is extraneous stress from the management to cut costs, the purchase manager may be forced to acquire the sub- quality input material. There might be other issues like purchase department would not have the competent staff to check the quality of material when it is received.

On the other hand, manufacturing department shall not shun away from his responsibility because had the manufacturing department informed in time about the quality of the material being inferior, corrective actions could have been initiated at that time and probably losses could have been avoided.

So as a plant manager, I need to understand the circumstances and then go for corrective action. The bottom line here is that cost cutting shall not be done at the cost of quality of input material. Secondly it is necessary that quality standards are predefined and any cost or pricing issue should be referred in connection with the predefined quality.