QUALITY

Introduction
Customers are becoming intolerant of poor quality and long delivery
time. Quality refers to a wide range of factors such as ;

 Fitness for use

 Customer satisfaction
 Degree to which product conform to design specification and
engineering requirement
Quality of design refers to how closely the characteristic of a product
or service meets the needs and want of customers . For example if
customers wants a photocopying machine that can do copying,
scanning and electronic printing. Photocopying machine which fails
to meet customer needs fails in its quality of design.
Conformance quality refers to performance of a product or service
relative to its design and specification. For example a photocopying
machine that mishandle papers or breakdown unnecessarily fails to
satisfy conformance quality.
Cost of Quality
Cost of quality are costs incurred to prevent or arising as a result of
production of low quality product. Product quality cost can be
classified into four groups;
1 Prevention costs – costs incurred to preclude the production of
products that do not conform to specifications. Examples include:
· Quality training; ·
Testing of new materials; ·
Supplier evaluation; ·
Preventive equipment maintenance; ·
Extra purchase price of higher quality materials; ·
Design engineering; and ·
Process engineering
2. Appraisal costs – costs incurred to detect which of the individual
units of products do not conform to specifications. Examples include:
· Inspection of goods received; ·
Product testing; ·
Inspection of part-finished production, i.e. work-in-progress; and ·
Inspection of finished output.

3. Internal failure costs – costs incurred on defective products before

they are shipped to customers. Examples include:
· Spoilage; ·
Rework; · Scrap; and ·
Staff waiting time and machine downtime due to disruption of
workflows caused by defective materials and part-finished products.

4. External failure costs – costs incurred on defective products after

they are shipped to customers. Examples include:
· Warranty repair costs; ·
Liability claims; ·
The replacement of failed products; ·
The cost of handling complaints; and ·
Additional transport costs
Appraisal and prevention costs are sometimes known as the cost of
conformance (for goods) or the costs of compliance (for services).
Internal and external failure costs are the costs of non-conformance or
non-compliance.
Question 1
The following data relates to financial information pertaining to quality in 2019
and 2020 (000)
2019 2020
Revenue N12,500 N10,000
Line inspection 85 110
Scrap 200 250
Design engineering 240 100
Cost of return goods 145 60
Product test equipment 50 50
Customer service 30 40
Rework cost 135 160
Preventive equipment maintaince 90 35
Product liability claim 100 200
Incoming material inspection 40 20
Breakdown maintaince 40 90
Product testing labour 75 220
Training 120 45
Warranty repair 200 300
Supplier evaluation 50 20
Required;
(a) Classify the cost items to four cost of quality;
(b) Calculate each cost of quality category to revenue in 2019 and 2020.
Comments on the trend of cost of quality in 2019 and 2020.

Question 2
a. Explain the FOUR classifications of cost of quality with examples of each.
(6 Marks)

b. Benson Dinka is the management accountant of Dynamic Plc. Mr. Dinka

realises that the present performance reporting system does not highlight quality
costs. The reports contain the information below, but he wants this to be
reported in an appropriate format.
The following information is available in respect of the year ended August 31,
2018.

1. Production data:
Units requiring rework 1,500
Units requiring warranty repair service 1,800
Design engineering hours 66,000
Inspection hours (manufacturing) 216,000

2. Cost data: N
Design engineering cost per hour 1,500
Inspection cost per hour (manufacturing) 800
Rework cost per heating system unit reworked
(manufacturing) 60,000
Customer support cost per repaired unit (marketing) 4,000
Transportation costs per repaired unit (distribution) 4,800
Warranty repair costs per repaired unit 64,000

3. Staff training costs amounted to N3,000,000 and product testing costs were
N980,000. 69
4. The marketing director has estimated that sales of 1,400 units were lost as a
result of bad publicity in trade journals. The average contribution per heating
system unit is estimated at N120,000.
Required:
Prepare a cost of quality report for Dynamic plc. that displays the four classes
of cost quality (showing the quantity , rate, total cost for each class and ratio of
each class total cost of all costs incurred by the four classes of cost of quality)