Managerial Accounting, 16e (Garrison) Appendix 1A Cost of Quality 1) ISO 9000 standards were established to make sure that all consumer products incorporate specific safety features. 2) External failure costs are limited to the costs of repairing defective products that are under warranty. 3) To minimize its total quality costs, a company should usually try to redistribute its quality costs more toward prevention and appraisal. 4) The most effective way to minimize quality costs while maintaining high quality is to avoid having quality problems in the first place. This is the reason for incurring appraisal costs. 5) Quality of conformance refers to the extent to which a product offered by one company is similar to products offered by other companies. 6) The costs of lost sales arising from poor quality are always included in quality cost reports. 7) A quality cost report is usually compiled by the purchasing department to show the added costs of purchasing higher quality components. 8) An increase in appraisal costs in a quality improvement program would usually have the following initial effects on internal and external failure costs: A) B) C) D) Internal failure costs Increase Increase Decrease Decrease External failure costs Increase Decrease Increase Decrease A) Choice A B) Choice B C) Choice C D) Choice D 9) Inspection of products would be classified as a(n): A) prevention cost. B) appraisal cost. C) internal failure cost. D) external failure cost. 1 Copyright © 2018 McGraw-Hill 10) An increase in appraisal costs will usually result in an increase in: A) prevention costs. B) internal failure costs. C) external failure costs. D) opportunity costs. 11) Quality is achieved when a product or service contains all of the features that a customer would expect, and when that product or service performs in such a way that the customer is satisfied. 12) The cost of quality training would be classified as a(n): A) prevention cost. B) appraisal cost. C) internal failure cost. D) external failure cost. 13) The cost of testing incoming materials received from suppliers would be classified as a(n): A) prevention cost. B) appraisal cost. C) internal failure cost. D) external failure cost. 14) The four categories of quality costs in a quality cost report are: A) external failure, product liability, prevention, and carrying. B) external failure, internal failure, prevention, and appraisal. C) warranty, product liability, prevention, and appraisal. D) warranty, product liability, training, and appraisal. 15) The cost of labor time required to rework defective units would be classified as a(n): A) prevention cost. B) appraisal cost. C) internal failure cost. D) external failure cost. 16) In classifying the costs of quality at a company that manufactures sonar equipment, which of the following is considered an external failure cost? A) the net cost of scrap and spoilage incurred during production. B) the cost of repairs and replacements made during the warranty period. C) the cost of debugging software errors found in the sonar equipment during inspection at the plant. D) both the cost of repairs and replacements made during the warranty period and the cost of debugging software errors found in the sonar equipment during inspection at the plant. E) none of the above. 2 Copyright © 2018 McGraw-Hill 17) Which of the following would be classified as an appraisal cost on a quality cost report? A) Final product testing and inspection. B) Net cost of spoilage. C) Repairs and replacements beyond the warranty period. D) Rework labor and overhead. 18) Which of the following would be classified as a prevention cost on a quality cost report? A) Technical support provided to suppliers. B) Net cost of spoilage. C) Disposal of defective products. D) Debugging software errors. 19) Which of the following would be classified as an internal failure cost on a quality cost report? A) Audits of the effectiveness of the quality system. B) Systems development. C) Quality improvement projects. D) Debugging software errors. 20) Which of the following would be classified as an internal failure cost on a quality cost report? A) Quality improvement projects. B) Supervision of testing and inspection activities. C) Debugging software errors. D) Warranty repairs and replacements. 21) Which of the following would be classified as an external failure cost on a quality cost report? A) Returns and allowances arising from quality problems. B) Quality improvement projects. C) Quality engineering. D) Net cost of spoilage. 22) Which of the following would be classified as an appraisal cost on a quality cost report? A) Returns and allowances arising from quality problems. B) Downtime caused by quality problems. C) Test and inspection of in-process goods. D) Cost of field servicing and handling complaints. 23) Which of the following would be classified as an external failure cost on a quality cost report? A) Repairs and replacements beyond the warranty period. B) Technical support provided to suppliers. C) Quality improvement projects. D) Rework labor and overhead. 3 Copyright © 2018 McGraw-Hill 24) Which of the following would be classified as an external failure cost on a quality cost report? A) Reentering data because of keying errors. B) Customer returns arising from quality problems. C) Test and inspection of in-process goods. D) Rework labor and overhead. 25) Which of the following would be classified as a prevention cost on a quality cost report? A) Net cost of spoilage. B) Supervision of testing and inspection activities. C) Liability arising from defective products. D) Technical support provided to suppliers. 26) Which of the following would be classified as a prevention cost on a quality cost report? A) Cost of field servicing and handling complaints. B) Warranty repairs and replacements. C) Systems development. D) Rework labor and overhead. 27) Which of the following would be classified as an external failure cost on a quality cost report? A) Final product testing and inspection. B) Disposal of defective products. C) Supervision of testing and inspection activities. D) Cost of field servicing and handling complaints. 28) In preparing a quality cost report, the cost of employee's time spent in quality circles is part of: A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. 29) Which of the following would be classified as an appraisal cost on a quality cost report? A) Test and inspection of in-process goods. B) Technical support provided to suppliers. C) Debugging software errors. D) Audits of the effectiveness of the quality system. 30) Which of the following would be classified as a prevention cost on a quality cost report? A) Debugging software errors. B) Quality training. C) Test and inspection of incoming materials. D) Cost of field servicing and handling complaints. 4 Copyright © 2018 McGraw-Hill 31) Which of the following would be classified as an appraisal cost on a quality cost report? A) Quality improvement projects. B) Supplies used in testing and inspection. C) Audits of the effectiveness of the quality system. D) Quality data gathering, analysis, and reporting. 32) Which of the following would be classified as an internal failure cost on a quality cost report? A) Final product testing and inspection. B) Warranty repairs and replacements. C) Depreciation of test equipment. D) Debugging software errors. 33) Which of the following would be classified as a prevention cost on a quality cost report? A) Disposal of defective products. B) Net cost of spoilage. C) Depreciation of test equipment. D) Technical support provided to suppliers. 34) Which of the following would be classified as an external failure cost on a quality cost report? A) Depreciation of test equipment. B) Repairs and replacements beyond the warranty period. C) Supplies used in testing and inspection. D) Re-entering data because of keying errors. 35) Which of the following would be classified as an internal failure cost on a quality cost report? A) Rework labor and overhead. B) Cost of field servicing and handling complaints. C) Technical support provided to suppliers. D) Lost sales arising from a reputation for poor quality. 36) Which of the following would be classified as an external failure cost on a quality cost report? A) Re-entering data because of keying errors. B) Repairs and replacements beyond the warranty period. C) Disposal of defective products. D) Technical support provided to suppliers. 37) Which of the following would be classified as an internal failure cost on a quality cost report? A) Rework labor and overhead. B) Technical support provided to suppliers. C) Quality improvement projects. D) Systems development. 5 Copyright © 2018 McGraw-Hill 38) Which of the following would be classified as an external failure cost on a quality cost report? A) Depreciation of test equipment. B) Test and inspection of in-process goods. C) Test and inspection of incoming materials. D) Warranty repairs and replacements. 39) Which of the following would be classified as an appraisal cost on a quality cost report? A) Debugging software errors. B) Supplies used in testing and inspection. C) Re-entering data because of keying errors. D) Warranty repairs and replacements. 40) Which of the following would be classified as a prevention cost on a quality cost report? A) Supplies used in testing and inspection. B) Debugging software errors. C) Quality improvement projects. D) Lost sales arising from a reputation for poor quality. 41) Which of the following would be classified as an appraisal cost on a quality cost report? A) Maintenance of test equipment. B) Re-entering data because of keying errors. C) Debugging software errors. D) Warranty repairs and replacements. 42) Adolphson Corporation has provided the following summary of its quality cost report for the last two years: Prevention costs Appraisal costs Internal failure costs External failure costs Total quality costs Summary of Quality Cost Report (in thousands) This Year Last Year $ 300 $ 200 315 210 114 190 621 1,200 $ 1,350 $ 1,800 % Change + 50 + 50 - 40 - 48 - 25 On the basis of this report, which one of the following statements is most likely correct? A) An increase in prevention and appraisal costs resulted in fewer defects, and therefore, resulted in a decrease in internal and external failure costs. B) A decrease in internal and external failure costs resulted in less need for prevention and appraisal costs. C) Quality costs such as scrap and rework decreased by 48%. D) Quality costs such as returns and repairs under warranty decreased by 40%. 6 Copyright © 2018 McGraw-Hill 43) Fackler Company's quality cost report is to be based on the following data: Quality circles Product recalls Supplies used in testing and inspection Net cost of scrap Liability arising from defective products Re-entering data because of keying errors Debugging software errors Test and inspection of incoming materials Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 12,000 24,000 87,000 59,000 38,000 65,000 19,000 65,000 55,000 What would be the total prevention cost appearing on the quality cost report? A) $99,000 B) $67,000 C) $120,000 D) $79,000 44) Fackler Company's quality cost report is to be based on the following data: Quality circles Product recalls Supplies used in testing and inspection Net cost of scrap Liability arising from defective products Re-entering data because of keying errors Debugging software errors Test and inspection of incoming materials Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ What would be the total appraisal cost appearing on the quality cost report? A) $130,000 B) $152,000 C) $146,000 D) $219,000 7 Copyright © 2018 McGraw-Hill 12,000 24,000 87,000 59,000 38,000 65,000 19,000 65,000 55,000 45) Fackler Company's quality cost report is to be based on the following data: Quality circles Product recalls Supplies used in testing and inspection Net cost of scrap Liability arising from defective products Re-entering data because of keying errors Debugging software errors Test and inspection of incoming materials Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 12,000 24,000 87,000 59,000 38,000 65,000 19,000 65,000 55,000 What would be the total internal failure cost appearing on the quality cost report? A) $143,000 B) $146,000 C) $97,000 D) $43,000 46) Fackler Company's quality cost report is to be based on the following data: Quality circles Product recalls Supplies used in testing and inspection Net cost of scrap Liability arising from defective products Re-entering data because of keying errors Debugging software errors Test and inspection of incoming materials Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 12,000 24,000 87,000 59,000 38,000 65,000 19,000 65,000 55,000 What would be the total external failure cost appearing on the quality cost report? A) $57,000 B) $62,000 C) $205,000 D) $424,000 8 Copyright © 2018 McGraw-Hill 47) Circle K Toys, Inc. manufactures toys and children's clothing and sells these products to retail outlets. The following costs were incurred in performing quality activities at Circle K during the year: Product recall activities Quality training activities Quality improvement activities Warranty claim activities Quality inspection and testing activities Rework activities Quality data collection and reporting activities $ $ $ $ $ $ $ 370,000 240,000 154,000 109,000 61,000 38,000 15,000 What is the total of the prevention costs for Circle K? A) $394,000 B) $409,000 C) $455,000 D) $470,000 48) Circle K Toys, Inc. manufactures toys and children's clothing and sells these products to retail outlets. The following costs were incurred in performing quality activities at Circle K during the year: Product recall activities Quality training activities Quality improvement activities Warranty claim activities Quality inspection and testing activities Rework activities Quality data collection and reporting activities What is the total of the internal failure costs for Circle K? A) $53,000 B) $99,000 C) $517,000 D) $38,000 9 Copyright © 2018 McGraw-Hill $ $ $ $ $ $ $ 370,000 240,000 154,000 109,000 61,000 38,000 15,000 49) Eaglin Company's quality cost report is to be based on the following data: Disposal of defective products Liability arising from defective products Test and inspection of in-process goods Systems development Net cost of spoilage Supervision of testing and inspection activities Lost sales due to poor quality Maintenance of test equipment Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 74,000 66,000 82,000 11,000 75,000 93,000 44,000 19,000 51,000 What would be the total prevention cost appearing on the quality cost report? A) $55,000 B) $30,000 C) $62,000 D) $133,000 50) Eaglin Company's quality cost report is to be based on the following data: Disposal of defective products Liability arising from defective products Test and inspection of in-process goods Systems development Net cost of spoilage Supervision of testing and inspection activities Lost sales due to poor quality Maintenance of test equipment Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ What would be the total appraisal cost appearing on the quality cost report? A) $194,000 B) $175,000 C) $112,000 D) $167,000 10 Copyright © 2018 McGraw-Hill 74,000 66,000 82,000 11,000 75,000 93,000 44,000 19,000 51,000 51) Eaglin Company's quality cost report is to be based on the following data: Disposal of defective products Liability arising from defective products Test and inspection of in-process goods Systems development Net cost of spoilage Supervision of testing and inspection activities Lost sales due to poor quality Maintenance of test equipment Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 74,000 66,000 82,000 11,000 75,000 93,000 44,000 19,000 51,000 What would be the total internal failure cost appearing on the quality cost report? A) $119,000 B) $149,000 C) $156,000 D) $140,000 52) Eaglin Company's quality cost report is to be based on the following data: Disposal of defective products Liability arising from defective products Test and inspection of in-process goods Systems development Net cost of spoilage Supervision of testing and inspection activities Lost sales due to poor quality Maintenance of test equipment Quality data gathering, analysis, and reporting $ $ $ $ $ $ $ $ $ 74,000 66,000 82,000 11,000 75,000 93,000 44,000 19,000 51,000 What would be the total external failure cost appearing on the quality cost report? A) $259,000 B) $110,000 C) $119,000 D) $515,000 11 Copyright © 2018 McGraw-Hill 53) Fabrick Company's quality cost report is to be based on the following data: Lost sales due to poor quality Quality data gathering, analysis, and reporting Net cost of spoilage Re-entering data because of keying errors Test and inspection of in-process goods Final product testing and inspection Statistical process control activities Returns arising from quality problems Downtime caused by quality problems $ $ $ $ $ $ $ $ $ 78,000 23,000 88,000 98,000 24,000 78,000 49,000 16,000 26,000 What would be the total prevention cost appearing on the quality cost report? A) $101,000 B) $72,000 C) $73,000 D) $96,000 54) Fabrick Company's quality cost report is to be based on the following data: Lost sales due to poor quality Quality data gathering, analysis, and reporting Net cost of spoilage Re-entering data because of keying errors Test and inspection of in-process goods Final product testing and inspection Statistical process control activities Returns arising from quality problems Downtime caused by quality problems $ $ $ $ $ $ $ $ $ What would be the total appraisal cost appearing on the quality cost report? A) $122,000 B) $174,000 C) $104,000 D) $102,000 12 Copyright © 2018 McGraw-Hill 78,000 23,000 88,000 98,000 24,000 78,000 49,000 16,000 26,000 55) Fabrick Company's quality cost report is to be based on the following data: Lost sales due to poor quality Quality data gathering, analysis, and reporting Net cost of spoilage Re-entering data because of keying errors Test and inspection of in-process goods Final product testing and inspection Statistical process control activities Returns arising from quality problems Downtime caused by quality problems $ $ $ $ $ $ $ $ $ 78,000 23,000 88,000 98,000 24,000 78,000 49,000 16,000 26,000 What would be the total internal failure cost appearing on the quality cost report? A) $212,000 B) $166,000 C) $122,000 D) $114,000 56) Fabrick Company's quality cost report is to be based on the following data: Lost sales due to poor quality Quality data gathering, analysis, and reporting Net cost of spoilage Re-entering data because of keying errors Test and inspection of in-process goods Final product testing and inspection Statistical process control activities Returns arising from quality problems Downtime caused by quality problems $ $ $ $ $ $ $ $ $ 78,000 23,000 88,000 98,000 24,000 78,000 49,000 16,000 26,000 What would be the total external failure cost appearing on the quality cost report? A) $94,000 B) $480,000 C) $104,000 D) $306,000 13 Copyright © 2018 McGraw-Hill 57) Eagleson Company's quality cost report is to be based on the following data: Net cost of scrap Liability arising from defective products Warranty repairs and replacements Re-entering data because of keying errors Supplies used in testing and inspection Quality data gathering, analysis, and reporting Final product testing and inspection Test and inspection of in-process goods Systems development $ $ $ $ $ $ $ $ $ 75,000 32,000 80,000 75,000 18,000 62,000 21,000 44,000 45,000 What would be the total prevention cost appearing on the quality cost report? A) $107,000 B) $125,000 C) $84,000 D) $89,000 58) Eagleson Company's quality cost report is to be based on the following data: Net cost of scrap Liability arising from defective products Warranty repairs and replacements Re-entering data because of keying errors Supplies used in testing and inspection Quality data gathering, analysis, and reporting Final product testing and inspection Test and inspection of in-process goods Systems development $ $ $ $ $ $ $ $ $ What would be the total appraisal cost appearing on the quality cost report? A) $93,000 B) $62,000 C) $39,000 D) $83,000 14 Copyright © 2018 McGraw-Hill 75,000 32,000 80,000 75,000 18,000 62,000 21,000 44,000 45,000 59) Eagleson Company's quality cost report is to be based on the following data: Net cost of scrap Liability arising from defective products Warranty repairs and replacements Re-entering data because of keying errors Supplies used in testing and inspection Quality data gathering, analysis, and reporting Final product testing and inspection Test and inspection of in-process goods Systems development $ $ $ $ $ $ $ $ $ 75,000 32,000 80,000 75,000 18,000 62,000 21,000 44,000 45,000 What would be the total internal failure cost appearing on the quality cost report? A) $155,000 B) $150,000 C) $96,000 D) $107,000 60) Eagleson Company's quality cost report is to be based on the following data: Net cost of scrap Liability arising from defective products Warranty repairs and replacements Re-entering data because of keying errors Supplies used in testing and inspection Quality data gathering, analysis, and reporting Final product testing and inspection Test and inspection of in-process goods Systems development $ $ $ $ $ $ $ $ $ 75,000 32,000 80,000 75,000 18,000 62,000 21,000 44,000 45,000 What would be the total external failure cost appearing on the quality cost report? A) $262,000 B) $155,000 C) $112,000 D) $451,000 15 Copyright © 2018 McGraw-Hill 61) Rigoletto Company's quality cost report is to be based on the following data: Lost sales due to poor quality Test and inspection of incoming materials Rework labor and overhead Test and inspection of in-process goods Product recalls Quality data gathering, analysis, and reporting Disposal of defective products Maintenance of test equipment Quality engineering $ $ $ $ $ $ $ $ $ 24,000 94,000 55,000 32,000 47,000 15,000 88,000 58,000 98,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs. 62) Galaviz Company's quality cost report is to be based on the following data: Net cost of spoilage Test and inspection of in-process goods Supplies used in testing and inspection Quality engineering Downtime caused by quality problems Systems development Supervision of testing and inspection activities Cost of field servicing and handling complaints Lost sales due to poor quality $ $ $ $ $ $ $ $ $ 32,000 56,000 88,000 60,000 89,000 63,000 31,000 39,000 62,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs. 16 Copyright © 2018 McGraw-Hill 63) Gadsen Company's quality cost report is to be based on the following data: Maintenance of test equipment Quality training Product recalls Quality circles Rework labor and overhead Liability arising from defective products Supervision of testing and inspection activities Re-entering data because of keying errors Supplies used in testing and inspection $ $ $ $ $ $ $ $ $ 38,000 40,000 89,000 29,000 34,000 16,000 50,000 50,000 36,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs. 64) Hartnett Company's quality cost report is to be based on the following data: Depreciation of test equipment Quality data gathering, analysis, and reporting Warranty repairs and replacements Net cost of scrap Disposal of defective products Debugging software errors Statistical process control activities Test and inspection of in-process goods Product recalls $ $ $ $ $ $ $ $ $ 80,000 15,000 68,000 93,000 81,000 22,000 21,000 52,000 40,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs. 17 Copyright © 2018 McGraw-Hill 65) Harwood Company's quality cost report is to be based on the following data: Depreciation of test equipment Quality circles Product recalls Test and inspection of incoming materials Debugging software errors Rework labor and overhead Technical support provided to suppliers Net cost of scrap Lost sales due to poor quality $ $ $ $ $ $ $ $ $ 94,000 54,000 20,000 82,000 11,000 48,000 12,000 29,000 74,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs. 66) Galben Company's quality cost report is to be based on the following data: Quality data gathering, analysis, and reporting Supervision of testing and inspection activities Liability arising from defective products Technical support provided to suppliers Disposal of defective products Depreciation of test equipment Downtime caused by quality problems Test and inspection of in-process goods Cost of field servicing and handling complaints $ $ $ $ $ $ $ $ $ 38,000 45,000 30,000 39,000 72,000 55,000 96,000 69,000 52,000 Required: Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.
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- Which would be classified as an external failure cost on a quality cost report?
- What are the external failure costs of quality?
- What are some examples of External failure costs?
- Which cost items would be classified as an internal failure cost on a quality costs report?
18 Copyright © 2018 McGraw-Hill
Which would be classified as an external failure cost on a quality cost report?
External failure costs are those costs incurred due to product failures after they have been sold to customers. These costs include the legal fees related to customer lawsuits, the loss of future sales from dissatisfied customers, product recalls, product return costs, and warranty costs.
What are the external failure costs of quality?
External failure cost is one of the three types of cost of quality. It includes the cost a company incurs after a defective product or service reaches the customer and it malfunctions. Two common examples of this cost are warranty cost, cost of the return, and cost of return and replacement.
What are some examples of External failure costs?
External failure costs when the defect is discovered after it has reached the customer. This is the most expensive category of quality costs. Examples include product returns, repairs, warranty claims, lost reputation, and lost business.
Which cost items would be classified as an internal failure cost on a quality costs report?
Internal Failure Costs: Examples include scrap, rework, re-inspection, re-testing, material review, material downgrades.