Question

Windy Kitchen is a manufacturer of baked beans. Kim Gordon is the CEO of Windy Kitchen and a strong believer in continuous quality improvement. Recently, Kim asked her management accountant, Tom Hardee, to gather further information about quality costs for her company. Below is a list of quality-related costs manually prepared by Tom for the years 20X1 and 20X2.

20X1 20X2

Customer Returns $3,000 $8,000

Handling Customer Complaints $6,000 $5,000

Inspection of WIP $20,000 $10,000 Machines Repair $16,000 $17,500

Product Recalls $2,000 $10,000

Quality Training $10,000 $8,000

Raw Materials Inspection $20,000 $15,000

Rework $15,000 $14,000 Scrap Processing $30,000 $40,000

Technical Training $50,000 $30,000 Total $172,000 $157,500

Sales revenue for Windy Kitchen was $500,000 in 20X1 and $550,000 in 20X2.

(a) Prepare a combined cost of quality report for Windy Kitchen for both 20X1 and 20X2. Include proportions of the major quality cost categories as a percentage of sales.

(b) When Kim, the CEO, receives the cost of quality report from you, she is amazed and says, “Why haven’t I been able to access this information from our accounting systems before?” Explain to Kim why she may not have been able to easily extract this information from the company’s accounting system?

(c) Kim is very happy that the total cost of quality has decreased from $172,000 to $157,500. She believes that the company is moving in the right direction. Analyse and assess Windy Kitchen’s quality improvement progress with respect to the cost of quality information you have calculated in part (a). Do you agree with Kim that the company is “moving in the right direction” on quality costs?

Answer 1

A.		Windy Kitchen
	Quality Cost Report for the year ended 20X2
		Quality Costs
		Year 20X2	Percentage (%) of sales	Year 20X1	Percentage (%) of sales
	Prevention Costs:
	* Quality Training	8,000		10,000
	* Technical Training	30,000		50,000
	Total	38,000	7	60,000	12
	Appraisal Costs:
	*Inspection of WIP	10,000		20,000
	*Raw Material Inspection	15,000		20,000
	Total	25,000	5	40,000	8
	Internal Failure Cost:
	*Rework	14,000		15,000
	*Scrap Processing	40,000		30,000
	Total	54,000	10	45,000	9
	External Failure Cost:
	*Machines Repair	17,500		16,000
	*Customer Returns	8,000		3,000
	*Handling Customer complaints	5,000		6,000
	*Product recalls	10,000		2,000
	Total	40,500	7	27,000	5
	Total Quality Cost	157,500	29	172,000	34
	Total Sales	550,000		500,000
	****Note: Calculation of percentage of sales calculated as total quality cost/Actual sales*100 for each proportions.

B. Cost of quality or quality costs in a broader sense is the expenses incurred by an organization in achieving and maintaining good quality as well as in managing poor quality throughout its line of operations with an aim to attain highest level of customer satisfaction. The cost of quality analysis triggers changes and provide proof why changes should be made. The need to improve the financial position of an organization directly correlates with the process of making quality improvements. Cost of poor quality will tend to zero, if every activities are performed well in time. The difficulties in implementation of a COQ system, insufficiency in reports results in wrong data interpretation.

C. Based on the information provided in the part A. Windy Kitchen’s should work on internal failure cost and External failure cost as in both the cases there percentage of sales is increasing while comparing 20X1 and 20X2 data. Windy Kitchen’s should focus on these areas and try to reduce the factors affecting these cost.

C (a). I believe Windy Kitchen’s is moving on right direction as percentage of sales on Prevention cost and appraisal cost is decreasing compared to Year 20X1 which saves the cost. However, Windy Kitchen’s should work on the internal and external failure cost to reduce the unnecessary expenditure to get the optimal results.