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

Exercise 38

Costs of Quality

The following represents the financial information for Trovatore Corporation, a manufacturer of electronic components, for two months:

	March	April
Sales	$245,000	$220,000
Costs
Process inspection	$ 1,650	$ 1,880
Scrap	1,850	1,930
Quality training	19,800	13,000
Warranty repairs	4,300	4,800
Testing equipment	7,000	7,000
Customer complaints	2,800	3,400
Rework	17,000	18,500
Preventive maintenance	13,500	9,500
Materials inspection	6,500	4,800
Field testing	9,400	12,400

Required

a.Classify these items into prevention (P), appraisal (A), internal failure (IF), or external failure (EF) costs.

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b.Calculate the ratio of the prevention, appraisal, internal failure, and external failure costs to sales for March and April.

Step 1 of 14

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Prevention costs

These costs are incurred to prevent the defects in the products or services like material inspection, process inspection, equipment inspection, training, product design and process control.

Appraisal costs

These costs are incurred to detect the defects in the products post production or identify the products not meeting the specifications like sampling at the end of process, testing on field etc.

Internal failure costs

These costs are incurred for correction or repair when any defect is found in the product before delivery to customer like material wasted, rework done to fix the problem, testing conducted post rectification etc.

External failure costs

These costs are incurred to fix the problems related to defective products, after delivery to customer like after warranty repairs, paying for product failure, trying to improve company image damaged due to faulty delivery, improving sales etc.