Question

Required information

[The following information applies to the questions displayed below.]

Acme Materials Company manufactures and sells synthetic coatings that can withstand high temperatures. Its primary customers are aviation manufacturers and maintenance companies. The following table contains financial information pertaining to cost of quality (COQ) in 2019 and 2020 (in thousands of dollars):

	2019			2020
Sales	$	15,400		$	19,400
Materials inspection		240			54
In-process (production) inspection		154			119
Finished product inspection		190			64
Preventive equipment maintenance		14			54
Scrap (net)		440			240
Warranty repairs		640			390
Product design engineering		144			210
Vendor certification		26			54
Direct costs of returned goods		215			74
Training of factory workers		34			134
Product testing—equipment maintenance		54			54
Product testing labor		150			84
Field repairs		64			34
Rework before shipment		180			194
Product-liability settlement		300			54
Emergency repair and maintenance		140			69

Required:

1. Classify the cost items in the table into cost-of-quality (COQ) categories.

2. Calculate the ratio of each COQ category to revenues in each of the 2 years.

3. Calculate the percentage change in each COQ category and total COQ and comment on the results:

a. Percentage change in total COQ as a percentage of sales, from 2019 to 2020;

b. Total COQ in 2020 expressed as a percentage of 2019 sales dollars;

c. Percentage change in total prevention costs, 2019 to 2020;

d. Percentage change in total appraisal costs, 2019 to 2020;

e. Percentage change in total internal failure costs, 2019 to 2020;

f. Percentage change in total external failure costs, 2019 to 2020.

Answer 1

1. Classify the cost items in the table into cost-of-quality (COQ) categories.

Prevention Costs		Apprisal costs	Internal failure costs	External failure costs
Product design engineering		Materials inspection	Scrap (net)	Warranty repairs
Training of factory workers		In-process (production) inspection	Rework before shipment	Direct costs of returned goods
Preventive equipment maintenance		Finished product inspection	Emergency repair and maintenance	Field repairs (Note 2)
Vendor certification (NOTE 1)		Product testing—equipment maintenance		Product-liability settlement
		Product Testing Labour

Note 1 : Vendor certification is an preventive cost , whereas on going Vendor verfication and surveillance after that is an appraisal cost.

Note 2 : Repairs to products sold both returned and in field are external failure costs.

2.Calculate the ratio of each COQ category to revenues in each of the 2 years

Particulars	2019	Ratio to REVENUE			2020		Ratio to REVENUE
Sales	$ 15,400.00	1			$ 19,400.00		1
Prevention Costs
Preventive equipment maintenance	$         14.00	0.09			$         54.00		0.28
Product design engineering	$       144.00	0.94			$       210.00		1.08
Vendor certification	$         26.00	0.17			$         54.00		0.28
Training of factory workers	$         34.00	0.22			$       134.00		0.69
Total Prevention Costs	$       218.00	1.42			$       452.00		2.33
Appraisal costs
Materials inspection	$       240.00	1.56			$         54.00		0.28
In-process (production) inspection	$       154.00	1.00			$       119.00		0.61
Finished product inspection	$       190.00	1.23			$         64.00		0.33
Product testing—equipment maintenance	$         54.00	0.35			$         54.00		0.28
Product testing labor	$       150.00	0.97			$         84.00		0.43
Total Appraisal costs	$       788.00	5.12			$       375.00		1.93
Internal failure costs
Scrap (net)	$       440.00	2.86			$       240.00		1.24
Rework before shipment	$       180.00	1.17			$       194.00		1.00
Emergency repair and maintenance	$       140.00	0.91			$         69.00		0.36
Total Internal failure costs	$       760.00	4.94			$       503.00		2.59
External failure costs
Warranty repairs	$       640.00	4.16			$       390.00		2.01
Direct costs of returned goods	$       215.00	1.40			$         74.00		0.38
Field repairs	$         64.00	0.42			$         34.00		0.18
Product-liability settlement	$       300.00	1.95			$         54.00		0.28
Total External failure costs	$   1,219.00	7.92			$      552.00		2.85
TOTAL COQ	$ 2985.00	19.38%			$1882.00		9.70%

3. Calculate the percentage change in each COQ category and total COQ

Particulars	2019		2020		Change from 2019		Percentage of change from 2019
Sales	$ 15,400.00		$ 19,400.00
Prevention Costs	$       218.00		$       452.00		$      234.00		107%
Appraisal costs	$       788.00		$       375.00		$    (413.00)		-52%
Internal failure costs	$       760.00		$       503.00		$    (257.00)		-34%
External failure costs	$   1,219.00		$      552.00		$    (667.00)		-55%
Total	$   2,985.00		$   1,882.00		$(1,103.00)		-37%

a. Percentage change in total COQ as a percentage of sales, from 2019 to 2020;

= 19.39% - 9.7%

= 9.69 %

There has been a decdrease in the percentage of expenses incurred as quality cost

b. Total COQ in 2020 expressed as a percentage of 2019 sales dollars;

= $1882/ $15,400

=12.22%

In 2019 the Total quality cost amounted to 19.39% of the Revenue. There is a decrease

c. Percentage change in total prevention costs, 2019 to 2020 = Increase by 107 %

d. Percentage change in total appraisal costs, 2019 to 2020 = Decrease by 52%

e. Percentage change in total internal failure costs, 2019 to 2020 = Decrease by 34%

f. Percentage change in total external failure costs, 2019 to 2020 = Decrease by 55%