What is the cost of quality in accounting?

2. Examples of the cost of quality

Letís assume that Fahrrad Company (a fictitious entity) manufactures and sells bicycles. In 20X2 the company had $1,000,000 in sales. The following information is available for Fahrrad in 20X2:

Costs:

Materials inspection

$ †††4,000

Finished products inspection

20,000

Product design reviews

10,000

Quality testing

3,000

Rework

5,000

Scrap

12,000

Employee quality training

30,000

Customer quality complaints

18,000

Returned goods

8,000

Letís create a simple cost of quality report for Fahrrad Company in 20X2.

Fahrrad Company
Cost of Quality Report
For the Year Ended December 31, 20X2

Category

Cost ($)

% of Sales

Prevention costs:

4.40%

Materials inspection

4,000

Employee quality training

30,000

Product design reviews

10,000

Total prevention costs

44,000

 

Appraisal costs:

2.30%

Finished products inspection

20,000

Quality testing

3,000

Total appraisal costs

23,000

 

Internal failure costs:

1.70%

Scrap

12,000

Rework

5,000

Total internal failure costs

17,000

     

External failure costs:

2.60%

Customer quality complaints

18,000

Returned goods

8,000

Total external failure costs:

26,000

 

Total cost of quality:

110,000

11.00%

The cost of quality report can help management identify areas that need improvement. Cost of quality controls can help to improve productivity, return on assets, return on investment, transportation, scheduling, vendor relations, etc. Quality controls can also reduce lead time, order process time, dock-to-stock (i.e., inspection-free materials acceptance), warehouse space, etc.

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