Backwoods American, Inc., produces expensive waterrepellent, down-lined parkas.
ID: 452928 • Letter: B
Question
Backwoods American, Inc., produces expensive waterrepellent, down-lined parkas. The company implemented a total quality-management program in 2005. Following are quality-related accounting data that have been accumulated for the five-year period after the program’s start.
2007 2008 2009 2010
Quality Costs (000s)
Prevention $3.2 10.7 28.3 42.6 50.0
Appraisal 26.3 29.2 30.6 24.1 19.6
Internal failure 39.1 51.3 48.4 35.9 32.1
External failure 118.6 110.5 105.2 91.3 65.2
Accounting Measures (000s)
Sales $2,700.6 2,690.1 2,705.3 2,310.2 2,880.7
Manufacturing
cost 420.9 423.4 424.7 436.1 435.5
a. Compute the company’s total failure costs as a percentage
of total quality costs for each of the five years.
Does there appear to be a trend to this result? If so,
speculate on what might have caused the trend.
b. Compute prevention costs and appraisal costs, each
as a percentage of total costs, during each of the five
years. Speculate on what the company’s quality strategy
appears to be.
c. Compute quality-sales indices and quality-cost indices
for each of the five years. Is it possible to assess the
effectiveness of the company’s quality-management
program from these index values?
d. List several examples of each quality-related cost—that
is, prevention, appraisal, and internal and external failure—
that might result from the production of parkas.
Explanation / Answer
a. The total quality cost showing a decreasing trend but the failure cost is having a faster decreasing trend
This can be due to an increase in product monitoring and inspection. 2006 2007 2008 2009 2010
Failure /Total Quality:
b.Prevention costs are increasing as a total percentage of total quality costs, while appraisal costs are declining
. The company appears to be focusing on prevention, as a result, the fewer appraisal activities are declining. 2006 2007 2008 2009 2010
Prevention /Total Quality:
Appraisal /Total Quality:
c.
Quality Sales Index = Quality Cost/Sales * 100
Quality Cost Index = Quality Cost / Cost * 100
These index values do not provide much information regarding effectiveness of the quality assurance program. But they are useful in making comparisons from one period to thenext and in showing trends in product quality overtime
d)
Prevention Cost: Market Research i.e. producing only high quality that which customers want. Designing an efficient and effective maufacturing process, traning workforce in making qulity products.
Appraisal : Inspection of raw material, workin-progress and finished product, equipment testing .
Internal Failure : Wasted materials and labor , defective products discovered during inspection, use of inefficient process, equipment downtime , poorly trained employees
External Failure : Defective products, customer complaints, warranty costs, lost sales,loss of good will.
2006 2007 2008 2009 2010 Prevention 3.2 10.7 28.3 42.6 50 Appraisal 26.3 29.2 30.6 24.1 19.6 Internal Failure 39.1 51.3 48.4 35.9 32.1 External Failure 118.6 110.5 105.2 91.3 65.2 Total Quality Cost 187.2 201.7 212.5 193.9 166.9Related Questions
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