Quality Cost (the cost of quality)

Table of contents :

  • Quality Cost (the cost of quality)
  • Types of Quality Costs:
  • Measuring and Reporting Quality Costs
  • Accounting for Production Process Losses
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Quality Cost ( the cost of quality )

Quality costs not only consist of costs to achieve quality, but also costs that will occur due to lack of quality.

In order to understand or also minimize the cost of quality, the types of quality costs should be identified or differentiated.

Types of Quality Costs:

  1. Prevention and preventive costs are costs that can occur to prevent product failure.

Prevention costs are the costs that have been incurred for designing high quality products and production systems, including the costs to implement and maintain these systems.

  1. The appraisal fee is a cost that will be incurred in detecting a product failure.
  2. Failure costs are costs incurred when the product fails; these failures can occur internally or externally. Internal failure costs are costs incurred during the production process.

Measuring and Reporting Quality Costs

To be successful in monitoring quality costs and evaluating their improvements, management accountants must be able to measure quality costs.

Quality cost reporting also provides direction by indicating opportunities for substantial improvement.

These failure costs can be due to poor quality parts from suppliers, obsolete machines, defective product designs, or other factors beyond the control of the cost center manager.

Accounting for Production Process Losses

Accounting to correct Production Losses in the calculation of this cost, this will be based on the Order, including the cost of the remaining raw materials, the cost of defective goods, the cost of reworking the defective goods.

Most of these losses could be due to a lack of quality or should be eliminated where possible.

Accounting for residual raw materials, this residual raw material can be divided into 3:

  • The residual powder that is left after the raw materials will be processed
  • Defective raw materials that cannot be used or returned to suppliers.
  • Parts that are damaged due to carelessness of workers or engine failure.

Example : woodco manufacturing company collects waste wood chips worth $ 500,. Then the journal is:

Cash (trade accounts receivable) 500
Sales of residual raw materials (or other income) 500

The accumulated amount can be credited to the cost of goods sold, so that it will reduce the total costs that can be charged to revenue.

Cash (and accounts receivable) 500
HPP 500

The amount that can be accumulated can be credited to the factory overhead controller, thereby minimizing overhead costs, the clause is as follows

Cash (or accounts receivable) 500
Factory overhead controllers 500

The sale of the remaining raw materials can be treated as a deduction for the cost of the raw materials that the order is charged for. The verse is:

Cash (or also accounts receivable) 500
Work in progress 500

To eliminate the need for inspection, management should identify suppliers of defective raw materials,

Then they will look for other alternative sources of high quality raw materials, or also cooperate with these suppliers to improve the quality of the raw materials they provide.

Cost accounting defective goods ( spoiled goods )

Assume that plastico Inc.this will produce 1000 plastic chairs with a special design for pizza king Inc., based on order no. 876 after producing 100 units of chairs, the customer wants to change the specifications.

These 100 seats are neither accessible to the customer nor repairable so that they can be accepted by the customer. Plastico can sell the 100 chairs as used goods for @ $ 10 and an additional 1000

 

Also Read:   Understanding Overhead Costs

 

seat units ordered so that the total number is 1100.The total costs are:

Raw materials $ 22,000
Labor 5,500
Factory overheads 11,000
Total order costs 38 500

Journal entry for completion of the order and also delivery to the customer, namely:

Defective goods inventory 1000
HPP 37500 Work
in progress 38 500

Plastico usually sells its products at a price of 150% of the cost. If billed at pizza king Inc. in the amount of 56250 journal entries:

Accounts receivable (or cash) 56 250
Sales 56 250

When the defective item is sold, the journal entry is:

Cash (or accounts receivable) 1000
Defective inventory 1000

 

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