Q38PGA-3 - Horngren'S Financial And Managerial Accounting

Question

Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

 

Activity                                                                         Predicted        Predetermined

                                                                             Reduction in  Overhead Allocation

                                                                               Activity Units         Rate per Unit

Inspection of incoming raw materials                             390                      $ 44

Inspection of finished goods                                            390                         19

Number of defective units discovered in-house         1,200                         50

Number of defective units discovered by customers    325                         72

Lost profits due to dissatisfied customers                       75                       102

 

Requirements

3. What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

 

Step-by-Step Solution

Answer

Answer

Different approaches to the COQ model are – PQC, TCOQ, and QFD models as they remove the difficulty of complexities, and are simple to understand and measure quality.

Step 1: Major difficulty in implementing the cost-of-quality approach

The difficulties in implementing the COQ approach are as follows –

1) Measuring the quality cost is the major difficulty as every cost cannot be measured like profit loss due to unhappiness of customers.

 

2) Another difficulty in implementing this approach is the lack of knowledge of using this approach efficiently.

 

3) Another difficulty arises due to the lack of needed tools to collect, organize, filter, and report quality costs.

Step 2: Alternative approaches to COQ

Alternative approaches to COQ are as follows –

1) Poor Quality cost – This is the improved model and ignores the prevention and appraisal costs as they are problematic to measure.

 

2) Total cost of quality – TCOQ model differs from COQ in the sense that TCOQ does not include maintenance and quality training costs as in the COQ model. Thus it is not a preferred model as that of COQ.

 

3) Qualified function development – QFD was developed to understand the customer requirements and maximize the quality positively by creating a comprehensive quality system.