Q44PGB - Horngren'S Financial And Managerial Accounting

Question

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

Activity	Predicted Reduction in Activity Units	Predetermined Overhead Allocation Rate per unit
Inspection of incoming raw materials	395	\( 44
Inspection of finished goods	395	26
Number of defective units discovered in-house	1,500	54
Number of defective units discovered by customers	275	73
Lost profits due to dissatisfied customers	100	103

Requirements

1. Calculate the predicted quality cost savings from the design engineering work.

2. Roxi spent \)106,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?

3. What major difficulty would Roxi’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

Predicted quality cost savings:$115,620

Net Benefit of design engineering:$12,620

Alternative approaches to COQ – Poor quality cost, Total quality cost, Qualified Function Development

 

Step-by-Step-Solution Step1: Calculation of predicted quality cost savings

Activity	Predicted reduction in activity units	Allocation rate per unit	Predicted quality cost savings
Inspection of incoming raw material	390	44	$17,160
Inspection of finished goods	390	19	$7,410
Number of defective units discovered in house	1200	50	$60,000
Number of defective units discovered by customers	325	72	$23,400
Lost profits due to dissatisfied customers	75	102	$7,650
Total predicted quality cost savings			$115,620

Step 2: Calculation of net benefit of preventive quality activity

Total predicted quality cost savings: $115,620

Amount spent on design engineering: $103,000

 $$\begin{gathered} Netbenefitofdesignengineering=Totalpredictedqualitycostsavings-Amountspentondesignengineering \\ =\$115,620-\$103,000 \\ =\$12,620 \end{gathered}$$

Step 3: Major difficulty in implementing the cost-of-quality approach and its alternatives

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.

 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.