Chapter 2 Theory for Quiz 2 PDF

QUALITY COSTS 23 microchip. Some conclusions that can be drawn are as follows. The unit-based (traditional) costing method tends to overcost the high-volume items within a product type. Also, since more complex products require more product-line costs, the activity-based costing method will make p...

QUALITY COSTS 23 microchip. Some conclusions that can be drawn are as follows. The unit-based (traditional) costing method tends to overcost the high-volume items within a product type. Also, since more complex products require more product-line costs, the activity-based costing method will make proportional allocations. However, the unit-based costing method, using direct labor as a measure of allocating overhead costs, will undercost more complex products. 1-12 QUALITY COSTS The value of a quality system is reflected in its ability to satisfy the customer. In this context, quality costs reflect the achievement or nonachievement of meeting product or service requirements, as determined from the perspective of the customer. These requirements may include design specifications of a product, operating instructions, government regulations, timely delivery, marketing procedures, and servicing commitments, among others. The various components of quality costs are designated based on product/service conformance or nonconformance. The achievement of requirements, identified by product or service conformance, consists of a cost component, identified as prevention costs, while nonconformance consists of the cost components of appraisal and failure costs (Campanella 1999). To summarize, quality costs may be interpreted as the difference between the actual cost and the reduced cost if products and services were all conforming. The four major categories of quality costs are discussed here. Prevention Costs Prevention costs are incurred in planning, implementing, and maintaining a quality system to prevent poor quality in products and services. They include salaries and developmental costs for product design, process and equipment design, process control techniques (through such means as control charts), information systems design, and all other costs associated with making the product right the first time. Also, costs associated with education and training are included in this category. Other such costs include those associated with defect cause and removal, process changes, and the cost of a quality audit. Prevention costs increase with the introduction of a quality system and, initially, may be a significant proportion of the total quality costs. However, the rate of increase slows with time. Even though prevention costs increase, they are more than justified by reductions in total quality costs due to reductions in internal and external failure costs. Appraisal Costs Appraisal costs are those associated with measuring, evaluating, or auditing products, com ponents, purchased materials, or services to determine their degree of conformance to the specified standards. Such costs include dealing with the inspection and testing of incoming materials as well as product inspection and testing at various phases of manufacturing and at final acceptance. Other costs in this category include the cost of calibrating and maintaining measuring instruments and equipment and the cost of materials and products consumed in a destructive test or devalued by reliability tests. Appraisal costs typically occur during or after production but before the product is released to the customer. Hence, they are associated with managing the outcome, whereas prevention costs are associated with managing the 24 INTRODUCTION TO QUALITY CONTROL AND THE TOTAL QUALITY SYSTEM intent or goal. Appraisal costs normally decline with time as more nonconformities are prevented from occurring. Internal Failure Costs Internal failure costs are incurred when products, components, materials, and services fail to meet quality requirements prior to the transfer of ownership to the customer. These costs would disappear if there were no nonconformities in the product or service. Internal failure costs include scrap and rework costs for the materials, labor, and overhead associated with production. The cost of correcting nonconforming units, as in rework, can include such additional manufacturing operations as regrinding the outside diameter of an oversized part. If the outside diameter were undersized, it would not be feasible to use it in the finished product, and the part would become scrap. The costs involved in determining the cause of failure or in reinspecting or retesting reworked products are other examples from this category. The cost of lost production time due to nonconformities must also be considered (e.g., if poor quality of raw materials requires retooling of equipment). Furthermore, downgrading costs, the revenue lost because a flawed product has to be sold at a lower price, constitutes another component. As a total quality system is implemented and becomes effective with time, internal failure costs will decline. Less scrap and rework will result as problems are prevented. External Failure Costs External failure costs are incurred when a product does not perform satisfactorily after ownership is transferred to the customer or services offered are nonconforming. If no nonconforming units were produced, this cost would vanish. Such costs include those due to customer complaints, which include the costs of investigation and adjustments, and those associated with receipt, handling, repair, and replacement of nonconforming products. Warranty charges (failure of a product within the warranty time) and product liability costs (costs or awards as an outcome of product liability litigation) also fall under this category. A reduction in external failure costs occurs when a quality control system is implemented successfully. Hidden Failure Costs The measurable components of failure costs include those associated with scrap, rework, or warranty, which are easily tracked by accounting systems. A significant segment of the failure costs are “hidden.” These include management and engineering time associated with cause identification and determination of remedial actions associated with failures. Line downtime, the necessity to carry increased inventory, the decrease in available capacity, and orders lost due to poor quality are examples of costs not easily tracked by accounting systems. Hence, what is typically reported as failure costs is but a minute portion of the true failure costs. Quality Costs Data Requirements Quality costs should be monitored carefully. Because indirect costs are as important as such direct costs as raw material and labor, well-defined accounting procedures should be