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Tutorial Document and Self Assessment Questions
Tutorial 4: Accounting for Quality and JIT
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Aim
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1. Explain the cost categories in a cost of quality programme 2. Identify the costs and benefits of quality improvements |
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Reading |
1. Bhimani et al. (Chapter 20 and 21) |
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Self assessment |
Complete the multiple choice questions for chapters 20 and 21. Consider the end-of-chapter review questions for chapters 20 and 21. |
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Tutorial Activities and Questions |
Attempts Galuppi Products (GPP) question supplied below and 20.16 Cost of quality analysis from Bhimani et al. |
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1 (i) Quality management tops the agenda at Galuppi Products (GPP), a manufacturer of electric devices since 1987 with a current share of 10% of the national market. Overseas competition is very fierce, especially from Japanese and German companies, some of which have now set up subsidiaries in the UK. Recent statistics have shown that these competitors have impressed customers with the quality of their products, their customer relationships and their reasonable prices, thus almost outperforming GPP.
The chairman and chief executive of GPP, Mr Tony Green, has become very concerned about the situation and has asked for a complete review of strategies and operations. Mr Green set up a task force headed by the chief management accountant to investigate GPP’s quality issues.
The following information is available in respect of the year ended 31 December:
a. GPP made an operating profit of £30 million on sales of £360 million.
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b. Product data: |
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Units manufactured and sold |
9,000
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Units requiring rework |
2,100
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Units requiring warranty repair service |
2,500
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Design engineering hours |
50,000 |
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Process engineering hours |
64,000
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Inspection hours (manufacturing) |
200,000
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c. Cost data |
£
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Design engineering per hour |
96
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Process engineering per hour |
70 |
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Inspection per hour (manufacturing) |
65
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Rework per communication system reworked (manufacturing) |
4,800
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Customer support per repaired unit (marketing) |
240
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Transport costs per repaired unit (distribution) |
280
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Warranty repairs per repaired unit (customer service) |
4,600
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d. Quality training costs amounted to £180,000 and additional product testing costs of £72,000.
e. The marketing director has estimated that sales of 1,500 units were lost as a result of public knowledge of poor quality at GPP. The average contribution per device is estimated at £11,000.
Required:
1 (i) Prepare a cost analysis that shows actual prevention costs, appraisal costs, internal failure costs and external failure costs for the year ended 31 Dec. Interpret your analysis pointing out any key features. Comment briefly on the inclusion of opportunity costs in such an analysis.
1 (ii) A detailed analysis has revealed that the casings in which the devices are housed are often subject to mishandling in transit to GPP’s manufacturing premises. Two alternative solutions were proposed by the design engineering team which aimed at reducing the quality problems. These are as follows:
Option A— Increase the number of immediate physical inspections of the casings when they are received from the supplier. This will require an additional 12,000 inspection hours.
Option B — Redesign and strengthen the casings and the containers used to transport them to better withstand mishandling during transportation. Redesign will require an additional 3000 hours of design engineering and an additional 7000 hours of process engineering.
Internal failure costs of rework for each reworked device are as follows:
£
Variable costs
(including direct materials, direct labour rework and supplies) 1,920
Allocated fixed costs
(equipment, space and allocated overhead 2,880
Total cost 4,800
The directors of GPP believe that, even if it is able to achieve improvements in quality, it will be unable to save any of the fixed costs of internal and external failure.
If GPP chooses to inspect the casings more carefully, it expects to eliminate rework on 800 devices whereas if it redesigns the casings it expects to eliminate rework on 890 devices.
If incoming casings are inspected more carefully, GPP estimates that 500 fewer devices will require warranty repair and that it will be able to sell an additional 450 devices. If the casing is redesigned, the directors estimate that 840 fewer devices will require warranty repair and that an additional 500 devices will be sold.
External failure costs of repair for each repaired communication systems are as follows:
Variable Fixed Total
costs costs costs
£ £ £
Customer support costs 96 144 240
Transportation costs 210 70 280
Warranty repair costs 1700 2900 4600
Required:
1 (ii). Prepare an estimate of the financial consequences of each option and advise Mr Green which option should be chosen.