Question

_{Salem Corporation is producing product A. The company had problems related to quality. Customers have been returning the product in the last months.}

_{ABC costing method and ABM can be used to manage quality.}

_{a.   Define each type of quality-related activity and give one example of each activity type.}

_{b.   Suppose the managers implement an ABC system to measure the costs of quality. How could they use information from this system to improve the product?}

Answer 1

Activity based costing is a mehtodology which assigns costs to activities rather than products or services.

Quality related activities are as follows:

1. Quality testing of inputs : The inputs used to manufacture a product or provide a particular service need to be tested by the quality control team of Salem Corporation

2. Quality testing of the final product : The quality control team needs to ensure the final or finished product that is sent to the customer is free of defects. In order to achieve that objective, the team can scientifically draw samples from the batches of the final product to ensure that reliable quality output is sent to the customer

3. Distribution : The final product is sent from the factory to the customer. Damage,if any, during the transportation process, from the factory to the hands of the customer, also needs to be assessed to ensure that customer receives the product in the same condition as it had left from the factory in.

4. Repairs and Maintenance : It is also necessary to ensure that the plant and equipment used to manufacture are adequately serviced and replaced as and when required. This will ensure production of quality output.

The implementation of the ABC system to measure quality costs will help to identify the cost incurred towards each quality-related activity and the effectiveness of each such activity carried out. This will help to focus on quality-related activities which bear significant improvement in quality of the final product to ensure that the quality requirements of the customers are adequately met.