What is the cost of quality in accounting?
2. Examples of the cost of quality
Let’s 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 |
Let’s create a simple cost of quality report for Fahrrad Company in 20X2.
Fahrrad Company |
|||
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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