Windy Kitchen is a manufacturer of baked beans. Kim Gordon is the CEO of Windy K

Question

Windy Kitchen is a manufacturer of baked beans. Kim Gordon is the CEO of Windy Kitchen and a strong believer in continuous quality improvement. Recently, Kim asked her management accountant, Tom Hardee, to gather further information about quality costs for her company. Below is a list of quality-related costs manually prepared by Tom for the years 20X1 and 20X2.

20X1 20X2

Customer Returns $3,000 $8,000

Handling Customer Complaints $6,000 $5,000

Inspection of WIP $20,000 $10,000 Machines Repair $16,000 $17,500

Product Recalls $2,000 $10,000

Quality Training $10,000 $8,000

Raw Materials Inspection $20,000 $15,000

Rework $15,000 $14,000 Scrap Processing $30,000 $40,000

Technical Training $50,000 $30,000 Total $172,000 $157,500

Sales revenue for Windy Kitchen was $500,000 in 20X1 and $550,000 in 20X2.

(a) Prepare a combined cost of quality report for Windy Kitchen for both 20X1 and 20X2. Include proportions of the major quality cost categories as a percentage of sales.

(b) When Kim, the CEO, receives the cost of quality report from you, she is amazed and says, “Why haven’t I been able to access this information from our accounting systems before?” Explain to Kim why she may not have been able to easily extract this information from the company’s accounting system?

(c) Kim is very happy that the total cost of quality has decreased from $172,000 to $157,500. She believes that the company is moving in the right direction. Analyse and assess Windy Kitchen’s quality improvement progress with respect to the cost of quality information you have calculated in part (a). Do you agree with Kim that the company is “moving in the right direction” on quality costs?

Explanation / Answer

B. Cost of quality or quality costs in a broader sense is the expenses incurred by an organization in achieving and maintaining good quality as well as in managing poor quality throughout its line of operations with an aim to attain highest level of customer satisfaction. The cost of quality analysis triggers changes and provide proof why changes should be made. The need to improve the financial position of an organization directly correlates with the process of making quality improvements. Cost of poor quality will tend to zero, if every activities are performed well in time. The difficulties in implementation of a COQ system, insufficiency in reports results in wrong data interpretation.

C. Based on the information provided in the part A. Windy Kitchen’s should work on internal failure cost and External failure cost as in both the cases there percentage of sales is increasing while comparing 20X1 and 20X2 data. Windy Kitchen’s should focus on these areas and try to reduce the factors affecting these cost.

C (a). I believe Windy Kitchen’s is moving on right direction as percentage of sales on Prevention cost and appraisal cost is decreasing compared to Year 20X1 which saves the cost. However, Windy Kitchen’s should work on the internal and external failure cost to reduce the unnecessary expenditure to get the optimal results.

A. Windy Kitchen Quality Cost Report for the year ended 20X2 Quality Costs Year 20X2 Percentage (%) of sales Year 20X1 Percentage (%) of sales Prevention Costs: * Quality Training                    8,000            10,000 * Technical Training                  30,000            50,000 Total                  38,000 7            60,000                          12 Appraisal Costs: *Inspection of WIP                  10,000            20,000 *Raw Material Inspection                  15,000            20,000 Total                  25,000                       5            40,000                            8 Internal Failure Cost: *Rework                  14,000            15,000 *Scrap Processing                  40,000            30,000 Total                  54,000                     10            45,000                            9 External Failure Cost: *Machines Repair                  17,500            16,000 *Customer Returns                    8,000              3,000 *Handling Customer complaints                    5,000              6,000 *Product recalls                  10,000              2,000 Total                  40,500                       7            27,000                            5 Total Quality Cost                157,500                     29          172,000                          34 Total Sales                550,000          500,000 ****Note: Calculation of percentage of sales calculated as total quality cost/Actual sales*100 for each proportions.

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