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For Each Period, Calculate The Ratio of Each COQ Category To Revenues

Osborn, Inc. produces cell phone equipment and has had a quality improvement program in place for 2 years led by President Amanda Westerly. The document shows Osborn's semi-annual cost of quality report for the past 1.5 years. It provides the prevention, appraisal, internal failure, and external failure costs as percentages of total revenues and quality costs for each period.

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Elliot Richard
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254 views2 pages

For Each Period, Calculate The Ratio of Each COQ Category To Revenues

Osborn, Inc. produces cell phone equipment and has had a quality improvement program in place for 2 years led by President Amanda Westerly. The document shows Osborn's semi-annual cost of quality report for the past 1.5 years. It provides the prevention, appraisal, internal failure, and external failure costs as percentages of total revenues and quality costs for each period.

Uploaded by

Elliot Richard
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Osborn, Inc., produces cell phone equipment.

Amanda Westerly, Osborn’s president,


implemented a quality-improvement program that has now been in operation for 2 years. The
cost report shown here has recently been issued.

Required:
1. For each period, calculate the ratio of each COQ category to revenues
and to total quality costs.
2. Based on the results of requirement 1, would you conclude that Osborn’s
quality program has been successful? Prepare a short report to present your
case.
3. Based on the 2015 survey, Amanda Westerly believed that Osborn had to
improve product quality. In making her case to Osborn management, how
might Westerly have estimated the opportunity cost of not implementing the
quality-improvement program?

19-
SOLUTION

(30 min.) Costs of quality.

1. The ratios of each COQ category to revenues and to total quality costs for each period are
as follows:
Osborn, Inc.: Semi-Annual Costs of Quality Report
(in thousands)

  6/30/2016 12/31/2016 6/30/2017


% of Total % of Total % of Total
% of Quality % of Quality % of Quality
  Actual Revenues Costs Actual Revenues Costs Actual Revenues Costs Actua
  (2) = (3) = (5) = (6) = (8) = (9) =
  (1) (1) ÷ $8,220 (1) ÷ $2,096 (4) (4) ÷ $9,180 (4) ÷ $2,168 (7) (7) ÷ $9,260 (7) ÷ $1,641 (10)
Prevention costs              
Machine maintenance $ 480   $ 480   $ 440   $ 29
Supplier training 21   90   45   3
Design reviews 30 218 198 19
Total prevention costs 531 6.5% 25.3% 788 8.6% 36.4% 683 7.4% 41.6% 52
Appraisal costs              
Incoming inspection 109   124   89   5
Final testing 327 327 302 20
Total appraisal costs 436 5.3% 20.8% 451 4.9% 20.8% 391 4.2% 23.8% 25
Internal failure costs              
Rework 226   206   166   11
Scrap 127 124 68 6
Total internal failure costs 353 4.3% 16.9% 330 3.6% 15.2% 234 2.5% 14.3% 18
External failure costs              
Warranty repairs 182   89   70   6
Customer returns 594 510 263 18
Total external failure costs 776 9.4% 37.0% 599 6.5% 27.6% 333 3.6% 20.3% 25
Total quality costs $2,096 25.5% 100.0% $2,168 23.6% 100.0% $1,641 17.7% 100.0% $1,21
Total revenues $8,220 $9,180  $9,260  $9,05

19-

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