CHAPTER 7
DISCUSSION QUESTIONS
Q7-1. Quality costs may be grouped into the follow- find better ways of doing things.
ing three classifications: Involvement can be successful only when
1. Prevention costs are the costs incurred to there is encouragement and an open and
prevent product failure. They include the honest environment of trust.
cost of designing high quality products 4. The company has a system of identifying
and production systems, including the quality problems, developing solutions,
costs of implementing and maintaining and setting quality improvement objec-
such systems. tives. This typically involves organizing
2. Appraisal costs are the costs incurred to employees from all ranks and from differ-
detect product failure. They include the ent organizational units along with man-
cost of inspecting and testing materials, agers who have authority to take the
inspecting products during production, necessary action to solve problems.
and the cost of obtaining information from 5. The company places a high value on its
customers about product satisfaction. employees and provides continuous train-
3. Failure costs are the costs incurred when a ing, as well as recognition for achieve-
product fails, and may occur internally or ment. Employees perform best when they
externally. Internal failure costs are those are well trained, and they have the great-
that occur during the manufacturing or pro- est capacity to contribute when they are
duction process (e.g., scrap, spoilage, and highly educated.
rework), and external failure costs are Q7-4. The concept of continuous quality improvement
those that occur after the product has differs from the concept of quality optimization
been sold (e.g., warranty repairs and in that continuous quality improvement is a
replacements, sales refunds, handling dynamic process of change under the assump-
customer complaints, and lost sales tion that the ideal is not an absolute known
resulting from poor product quality). value; whereas quality optimization is a static
Q7-2. TQM stands for total quality management, approach to finding the best solution to a
which is a company-wide approach to quality given set of fixed and known constraints.
improvement in all processes and activities. Q7-5. The first problem with trying to inspect quality
TQM is a pervasive philosophy of doing busi- into the product is that it detects internal fail-
ness that applies to all functional areas of the ures only after considerable cost has been
company and to all personnel. incurred. The second problem is that the mag-
Q7-3. Five characteristics of TQM systems are: nitude of the cost of the internal failures,
1. The company’s objective for all business detected by inspection, is rarely measured
activity is to serve its customers. The term and typically ignored.
“product” is extended to include services Q7-6. Companies should concentrate their efforts
as well as goods, and “customer” includes on preventing poor quality rather than on try-
internal users as well as those outside of ing to inspect it into the process, because it
the company who purchase the company’s will result in less total quality cost. The
products. Each employee’s activity is ori- approach is founded on the belief that by
ented to providing service to the customer. increasing prevention costs, the cost of inter-
2. Top management provides an active nal failures—such as scrap, spoilage, rework,
leadership role in the quality improvement and downtime—will decline by a larger
movement. amount than the increase in prevention costs.
3. All employees are actively involved in Q7-7. Quality costs should be measured and
quality improvement. Employees are not reported to management in order to provide
only asked to contribute ideas, but also to incentive and direction for improving quality.
7-1
,7-2 Chapter 7
Large quality costs indicate large opportuni- are often quite high and often result from
ties for improvement. Also, measurements internal failures that can be eliminated.
provide a basis for monitoring the cost of Ignoring the cost of these internal failures
quality and evaluating improvements. sends a signal to managers that such costs
Q7-8. Scrap includes (1) the filings and trimmings are acceptable. Reporting such costs pro-
remaining after processing materials, (2) vides incentive for improvement, particularly if
defective materials that cannot be used or the costs are large.
returned to the vendor, and (3) broken parts Q7-10. In order to know what to do with the cost, the
resulting from employee errors or machine accountant must know whether the spoilage or
failures. Spoiled goods differ from scrap in rework is caused by the customer or by an
that they are partially or fully completed units internal failure. If spoilage or rework is the
that are in some way defective and are not result of a customer requirement, the unrecov-
economically or physically correctable. erable cost should be charged to the job. On
Spoiled goods may be units of the product or the other hand, if the spoilage or rework is the
component parts, and they may or may not consequence of an internal failure, the unre-
have a salvage value. Rework is the process coverable cost should be removed from the job
of correcting defective manufactured goods. (i.e., charged to Factory Overhead Control)
Q7-9. The cost of scrap, spoilage, and rework and reported to responsible management.
should not be ignored, because such costs
,Chapter 7 7-3
EXERCISES
E7-1
(1) Accounts Receivable ................................................... 1,650
Scrap Sales (or Other Income)........................... 1,650
(2) Accounts Receivable ................................................... 1,650
Cost of Goods Sold............................................. 1,650
(3) Accounts Receivable ................................................... 1,650
Factory Overhead Control ................................. 1,650
(4) Accounts Receivable ................................................... 1,650
Work in Process ................................................. 1,650
E7-2 Spoiled Goods Inventory ............................................. 120
Factory Overhead Control ........................................... 112
Work in Process ................................................. 232
E7-3 $27,000 total job cost/1,000 chairs = $27 cost per chair
Spoiled Goods Inventory ($10 × 100 chairs).............. 1,000
Factory Overhead Control (($27 – $10) × 100)........... 1,700
Finished Goods Inventory ($27 × 900 chairs)............ 24,300
Work in Process ................................................. 27,000
E7-4 Spoiled goods inventory ($100 × 100 units) .............. 10,000
Cost of Goods Sold...................................................... 94,000
Work in Process ................................................. 104,000
E7-5 Factory Overhead Control ........................................... 700
Materials (100 units × $1.50)............................... 150
Payroll (100 units × 1/4 hour × $10 per hour) ... 250
Applied Factory Overhead
(100 × 1/4 hr × $12 rate) ............................. 300
Finished Goods Inventory ........................................... 6,600
Work in Process ................................................. 6,600
, 7-4 Chapter 7
E7-6 Work in Process............................................................ 8,500
Materials (1,000 units × $1)................................. 1,000
Payroll (1,000 units × 1/6 hour × $15) ................ 2,500
Applied Factory Overhead (1,000 × 1/6 × $30).. 5,000
Cost of Goods Sold...................................................... 73,500
Work in Process ($65,000 + $8,500)................... 73,500
Accounts Receivable ($73,500 × 150%) ..................... 110,250
Sales ..................................................................... 110,250
DISCUSSION QUESTIONS
Q7-1. Quality costs may be grouped into the follow- find better ways of doing things.
ing three classifications: Involvement can be successful only when
1. Prevention costs are the costs incurred to there is encouragement and an open and
prevent product failure. They include the honest environment of trust.
cost of designing high quality products 4. The company has a system of identifying
and production systems, including the quality problems, developing solutions,
costs of implementing and maintaining and setting quality improvement objec-
such systems. tives. This typically involves organizing
2. Appraisal costs are the costs incurred to employees from all ranks and from differ-
detect product failure. They include the ent organizational units along with man-
cost of inspecting and testing materials, agers who have authority to take the
inspecting products during production, necessary action to solve problems.
and the cost of obtaining information from 5. The company places a high value on its
customers about product satisfaction. employees and provides continuous train-
3. Failure costs are the costs incurred when a ing, as well as recognition for achieve-
product fails, and may occur internally or ment. Employees perform best when they
externally. Internal failure costs are those are well trained, and they have the great-
that occur during the manufacturing or pro- est capacity to contribute when they are
duction process (e.g., scrap, spoilage, and highly educated.
rework), and external failure costs are Q7-4. The concept of continuous quality improvement
those that occur after the product has differs from the concept of quality optimization
been sold (e.g., warranty repairs and in that continuous quality improvement is a
replacements, sales refunds, handling dynamic process of change under the assump-
customer complaints, and lost sales tion that the ideal is not an absolute known
resulting from poor product quality). value; whereas quality optimization is a static
Q7-2. TQM stands for total quality management, approach to finding the best solution to a
which is a company-wide approach to quality given set of fixed and known constraints.
improvement in all processes and activities. Q7-5. The first problem with trying to inspect quality
TQM is a pervasive philosophy of doing busi- into the product is that it detects internal fail-
ness that applies to all functional areas of the ures only after considerable cost has been
company and to all personnel. incurred. The second problem is that the mag-
Q7-3. Five characteristics of TQM systems are: nitude of the cost of the internal failures,
1. The company’s objective for all business detected by inspection, is rarely measured
activity is to serve its customers. The term and typically ignored.
“product” is extended to include services Q7-6. Companies should concentrate their efforts
as well as goods, and “customer” includes on preventing poor quality rather than on try-
internal users as well as those outside of ing to inspect it into the process, because it
the company who purchase the company’s will result in less total quality cost. The
products. Each employee’s activity is ori- approach is founded on the belief that by
ented to providing service to the customer. increasing prevention costs, the cost of inter-
2. Top management provides an active nal failures—such as scrap, spoilage, rework,
leadership role in the quality improvement and downtime—will decline by a larger
movement. amount than the increase in prevention costs.
3. All employees are actively involved in Q7-7. Quality costs should be measured and
quality improvement. Employees are not reported to management in order to provide
only asked to contribute ideas, but also to incentive and direction for improving quality.
7-1
,7-2 Chapter 7
Large quality costs indicate large opportuni- are often quite high and often result from
ties for improvement. Also, measurements internal failures that can be eliminated.
provide a basis for monitoring the cost of Ignoring the cost of these internal failures
quality and evaluating improvements. sends a signal to managers that such costs
Q7-8. Scrap includes (1) the filings and trimmings are acceptable. Reporting such costs pro-
remaining after processing materials, (2) vides incentive for improvement, particularly if
defective materials that cannot be used or the costs are large.
returned to the vendor, and (3) broken parts Q7-10. In order to know what to do with the cost, the
resulting from employee errors or machine accountant must know whether the spoilage or
failures. Spoiled goods differ from scrap in rework is caused by the customer or by an
that they are partially or fully completed units internal failure. If spoilage or rework is the
that are in some way defective and are not result of a customer requirement, the unrecov-
economically or physically correctable. erable cost should be charged to the job. On
Spoiled goods may be units of the product or the other hand, if the spoilage or rework is the
component parts, and they may or may not consequence of an internal failure, the unre-
have a salvage value. Rework is the process coverable cost should be removed from the job
of correcting defective manufactured goods. (i.e., charged to Factory Overhead Control)
Q7-9. The cost of scrap, spoilage, and rework and reported to responsible management.
should not be ignored, because such costs
,Chapter 7 7-3
EXERCISES
E7-1
(1) Accounts Receivable ................................................... 1,650
Scrap Sales (or Other Income)........................... 1,650
(2) Accounts Receivable ................................................... 1,650
Cost of Goods Sold............................................. 1,650
(3) Accounts Receivable ................................................... 1,650
Factory Overhead Control ................................. 1,650
(4) Accounts Receivable ................................................... 1,650
Work in Process ................................................. 1,650
E7-2 Spoiled Goods Inventory ............................................. 120
Factory Overhead Control ........................................... 112
Work in Process ................................................. 232
E7-3 $27,000 total job cost/1,000 chairs = $27 cost per chair
Spoiled Goods Inventory ($10 × 100 chairs).............. 1,000
Factory Overhead Control (($27 – $10) × 100)........... 1,700
Finished Goods Inventory ($27 × 900 chairs)............ 24,300
Work in Process ................................................. 27,000
E7-4 Spoiled goods inventory ($100 × 100 units) .............. 10,000
Cost of Goods Sold...................................................... 94,000
Work in Process ................................................. 104,000
E7-5 Factory Overhead Control ........................................... 700
Materials (100 units × $1.50)............................... 150
Payroll (100 units × 1/4 hour × $10 per hour) ... 250
Applied Factory Overhead
(100 × 1/4 hr × $12 rate) ............................. 300
Finished Goods Inventory ........................................... 6,600
Work in Process ................................................. 6,600
, 7-4 Chapter 7
E7-6 Work in Process............................................................ 8,500
Materials (1,000 units × $1)................................. 1,000
Payroll (1,000 units × 1/6 hour × $15) ................ 2,500
Applied Factory Overhead (1,000 × 1/6 × $30).. 5,000
Cost of Goods Sold...................................................... 73,500
Work in Process ($65,000 + $8,500)................... 73,500
Accounts Receivable ($73,500 × 150%) ..................... 110,250
Sales ..................................................................... 110,250
