Question

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	$	16,500		$	20,500
Materials inspection		350			65
In-process (production) inspection		165			130
Finished product inspection		300			75
Preventive equipment maintenance		25			65
Scrap (net)		550			350
Warranty repairs		750			500
Product design engineering		155			320
Vendor certification		15			65
Direct costs of returned goods		325			85
Training of factory workers		45			145
Product testing—equipment maintenance		65			65
Product testing labor		260			95
Field repairs		75			45
Rework before shipment		290			205
Product-liability settlement		410			65
Emergency repair and maintenance		250			80

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

Question no 1 ,2 , 3 and 3(a) are included in this table
		2019	2020
SI NO	Particulars	Amount in $	Amount in $	Classification of Quality cost	Ratio to revenue	% change in Cost of quality
1	Sales	16,500	20,500		2019	2020
2	Materials inspection	350	65	Appraisal cost	2.12%	0.32%	-1.80%
3	In-process (production) inspection	165	130	Appraisal cost	1.00%	0.63%	-0.37%
4	Finished product inspection	300	75	Appraisal cost	1.82%	0.37%	-1.45%
5	Preventive equipment maintenance	25	65	Prevention cost	0.15%	0.32%	0.17%
6	Scrap (net)	550	350	Internal failure cost	3.33%	1.71%	-1.63%
7	Warranty repairs	750	500	External failure cost	4.55%	2.44%	-2.11%
8	Product design engineering	155	320	Prevention cost	0.94%	1.56%	0.62%
9	Vendor certification	15	65	Prevention cost	0.09%	0.32%	0.23%
10	Direct costs of returned goods	325	85	Internal failure cost	1.97%	0.41%	-1.56%
11	Training of factory workers	45	145	Prevention cost	0.27%	0.71%	0.43%
12	Product testing—equipment maintenance	65	65	Appraisal cost	0.39%	0.32%	-0.08%
13	Product testing labor	260	95	Appraisal cost	1.58%	0.46%	-1.11%
14	Field repairs	75	45	Appraisal cost	0.45%	0.22%	-0.24%
15	Rework before shipment	290	205	Internal failure cost	1.76%	1.00%	-0.76%
16	Product-liability settlement	410	65	External failure cost	2.48%	0.32%	-2.17%
17	Emergency repair and maintenance	250	80	External failure cost	1.52%	0.39%	-1.12%
Percentage change in total COQ as a percentage of sales, from 2019 to 2020	4030	2355		24.42%	11.49%	-12.94%
Comment :
1	Overall total quality cost reduced by 12.94%
2	Prevention cost increased by 1.45%
3	Appraisal cost decreased by 5.05%
4	Internal failure cost decreased by 3.94%
5	External failure cost decreased by 5.40%
	Even though prevention cost increased , it will benefit in the long run Qus 3c Percentage change in total prevention costs, 2019 to 2020; 2019 2020 SI NO Particulars Amount in $ Amount in $ Sales 16,500 20,500 1 Preventive equipment maintenance 25 65 2 Product design engineering 155 320 3 Vendor certification 15 65 4 Training of factory workers 45 145 240 595 Ratio to revenue 1.45% 2.90% % change -1.45% Qus 3d Percentage change in total appraisal costs, 2019 to 2020 2019 2020 SI NO Particulars Amount in $ Amount in $ Sales 16,500 20,500 1 Materials inspection 350 65 2 In-process (production) inspection 165 130 3 Finished product inspection 300 75 4 Product testing—equipment maintenance 65 65 5 Product testing labor 260 95 6 Field repairs 75 45 1215 475 Ratio to revenue 7.36% 2.32% % change 5.05% Qus 3e Percentage change in total internal failure costs, 2019 to 2020; 2019 2020 SI NO Particulars Amount in $ Amount in $ Sales 16,500 20,500 1 Scrap (net) 550 350 2 Direct costs of returned goods 325 85 3 Rework before shipment 290 205 1165 640 Ratio to revenue 7.06% 3.12% % change 3.94%

Qus 3f
Percentage change in total external failure costs, 2019 to 2020.
		2019	2020
SI NO	Particulars	Amount in $	Amount in $
	Sales	16,500	20,500
1	Warranty repairs	750	500
2	Product-liability settlement	410	65
3	Emergency repair and maintenance	250	80
		1410	645
	Ratio to revenue	8.55%	3.15%
	% change	5.40%