Exam 17: The Management and Control of Quality

White Financial Services Corporation is engaged in mortgage origination and investment servicing activities with annual revenues of more than $90 million. Roberta White, CEO, recently has discovered that errors are costing the company over $800,000 per year. Jeremy Aiken, Vice President of Sales, dismisses the significance of the errors. Since the cost of errors is less than 1.0% of revenues, he believes the company should ignore the errors and concentrate instead on generating additional revenues. The consulting firm that made the discovery proposed to establish operating procedures for White that would build quality checks into operations. The interviewing, writing, and training activities associated with this project are expected to cost $450,000. Once the procedure is in place, the consultant believes, all errors will be eliminated. Jeremy argues that no system can be error-free and that the procedure is most likely to eliminate 80 percent of the errors. James White, Vice President of Customer Services, suggests that the company can hire 10 additional workers at an average salary of $30,000 (including fringe benefits) to double-check the work of people in sensitive areas. Required: What do you think White Financial Services Company should do? Support your answer with a logical analysis of the three alternatives (hire the consulting firm, hire additional workers, or do nothing about the errors and concentrate on additional revenues).

Typically, as prevention and appraisal costs increase, other costs of quality:

A ________ shows trends in a quality measure over time.

In a lean accounting system, costs are assigned to products by:

The Old Army Jean Company has been very proud of the quality of its products. The company has won industry awards for high quality and trend-setting styles in the last five years. For the last two years, however, both sales volume and market share have been declining. At the latest executive managers' meeting, everyone was blaming everyone else for the decline. Both production and design managers suggested that sales relationships were the cause of most of the problems. Required: As the CEO, how would you determine whether quality of sales relationships, not product design or product quality, is the cause of the financial decline the company is experiencing?

Costs incurred because of poor quality found through appraisal prior to delivery of the product to the customer are, in a Cost-of-Quality (COQ) reporting framework, considered:

Which of the following terms represents the unyielding and continuous effort by everyone in the organization to understand, meet, and exceed customer expectations?

In a Cost of Quality (COQ) report, costs to acquire and install training equipment would be classified as:

Steel Inc. specializes in manufacturing ship doors. The blueprint specification for the thickness of a high-demand model calls for 0.90 ± 0.05 inch. The estimated cost to the firm is $800 to scrap a part that is outside of specification (i.e., for each unit where the thickness exceeds 0.95 inches or is less than 0.85 inches.). The thickness measure, x, for the unit just completed is 0.87. Required: 1. Calculate (to the nearest dollar) the value of k, the cost coefficient in the Taguchi loss function. 2. Calculate the estimated quality loss, L(x), for x = 0.87; round your answer to the nearest dollar.

Which of the following statements is not true?

Kray Co. manufactures high-quality knives for use in the meat processing industry, and operates in an industry that values and rewards consistent production quality. Technical innovation over the past decade has given the industry a good supply of high-quality steel in raw material form. Kray Co. recognizes the need to establish and maintain strong quality controls for labor activities. A company quality team has asked you to assist the company in recommending either a goalpost conformance quality plan or an absolute quality conformance plan to monitor its manufacturing activities. Required: 1. Briefly distinguish between the two approaches to ensuring conformance with production standards. 2. Explain how the Taguchi Quality Loss Function (QLF) operates within the absolute quality conformance plan. 3. Do you think worker reaction to the two plans in Part (1) above might be different? Why or why not?

Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training related to the inspection/appraisal process and $150,000 for inspection equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future. What is the expected net change in total cost of quality (COQ) projected for 2020?

Turbo-Oven, Inc. is considering a move to cellular manufacturing. Management of the company has requested that you, as the management accountant for the organization, supply it with information that will help inform the decision as to whether such a move is desirable. Your research into past performance of the company as well as extensive discussion with the manager of operations and the sales manager produced the following information: Required: 1. In terms of the above information, provide for management of the company a rationale as to why you included each of the following items: a. increase in total sales revenue b. decrease in direct materials cost as a percentage of sales c. decrease in holdings of Work-in-Process (WIP) inventory 2. Provide an estimate of each of the following financial effects associated with the proposed move to a cellular manufacturing layout (round all answers to nearest dollar): a. change in total (out-of-pocket) manufacturing costs b. reduction in WIP inventory holdings c. net financial effect of the change, per year 3. In general, what types of costs would need to be incurred to reap the benefits outlined above in Requirement 2?

A graphical method that organizes a chain of causes and effects to sort out root causes and identify relationships between causes or variables is a(n):

The four categories of cost associated with a Cost-of-Quality (COQ) reporting system are:

Management accountants can help support the quality initiatives of management by supplying decision makers with relevant financial information regarding these initiatives. Which of the following statements is true regarding costs that are relevant for decision making within this context?

The Hormosa Company classifies its overall Cost of Quality (COQ) into four categories. COQ components, as a percentage of cost of goods sold for the last three years, are as follows: COQ Component 2019 2020 2021 (1) Prevention costs 2.00\% 4.00\% 1.00\% (2)Appraisal costs 1.50\% 2.50\% 3.00\% (3)Internal failure costs 14.50\% 24.00\% 26.00\% (4)External failure costs 12.00\% 19.50\% 30.00\% Required: 1. Prepare a histogram that shows the COQ trends for each of the four components of COQ as well as total COQ over the period 2019 through 2021. Note: Index numbers (1) through (4) may be used in place of a description key. For example, in labeling your histogram you can use "1" to refer to "Prevention Costs," etc. 2. Of what interpretive or managerial value is the histogram you prepared, both in a general sense and as it relates to the data set at hand?

One of the key elements of lean accounting is the use of the value stream income statement. Which of the following is not a characteristic of value stream income?

A common characteristic among control charts, histograms, Pareto diagrams, and cause-and-effect diagrams is that they are all:

Identify the appropriate cost-of-quality (COQ) category for each of the following items: 1. Engineering time spent to simplify production processes. 2. Engineering time spent on engineering change orders to reduce the number of component used in a current product. 3. Scrap resulting from substandard materials undetected by the receiving personnel. 4. Rework to correct inconsistency caused by machine variability. 5. Preventive maintenance on machinery. 6. Product inspections. 7. Air freight to replace a defective part discovered by a customer. 8. Long-distance call to a customer who has experienced a quality failure.