Chapter 7

THE COST OF QUALITY AND ACCOUNTING FOR PRODUCTION LOSSES

Learning 9, 10 F2F

Matakuliah : COST ACCOUNTINGTahun : 2009

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The Cost of QualityThe cost of quality is not only the cost of obtaining quality but also the cost incurred from a lack of quality.

Types of quality costs:1.Prevention costs, are the costs incurred to prevent product failure. For example: costs of implementing and maintaining such systems.2.Appraisal costs, are the costs incurred to detect product failure. For example: cost of inspecting and testing materials. 3.Failure costs, are the costs incurred when a product fails; they can occur internally or externally.

• Internally failure costs, arhas been soldhas been sold, such as the cost of warrantye those that occur during the production process, such as the costs of scrap, spoilage, rework.

• Externally failure costs, are those that occur after the product has been sold, such as the cost of warranty repairs and replacements, the cost of handling customer complaints, the cost of lost sales.

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To eliminate poor quality, world-class producers adopt a

total quality management philosophy.

Total Quality Management (TQM) is a company wide

approach to quality improvement that seeks to improve

quality in all processes and activities.

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There is no one quick way to achieve quality. Quality improvement must be a continuous process .

Continuous quality improvement requires the constant effort of every one in the company - both management

and labor - working together, and that while quality will

improve over time, the process of continual improvement never ends and never becomes easier.

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To monitor successfully the cost of quality and evaluate

improvements, management accountants must be able to

measure the cost of quality.

Reporting quality costs also provides direction by indicating

opportunities for substantial improvement.

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Accounting for Production Losses in a Job Order Cost System

Production losses in job order cost system include the cost

of materials scrap, spoiled goods, and reworking defective

goods.

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Accounting for Scrap

Scrap includes:1. The fillings or trimmings remaining after

processing materials.2. Defective materials that cannot be used or

returned to the vendor.3. Broken parts resulting from employee or machine

failures

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Accounting for Spoiled Goods

Spoiled goods are not correctable either because technically it is not possible to correct them or

because it is not economical to correct them.

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Accounting for Spoiled Goods

Spoilage can be caused by an act of the customer, such as a change in specifications after production is begun or imposition of unusually close production tolerances.

Spoilage also can be caused by an internal failure, such as an employee error or a badly worn tool.

The accounting treatment for spoiled goods depends on which of these two types of cause is present.

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Accounting for Rework

Rework is the process of correcting defective goods. Rework can result from either an act of the

customer or an internal failure.

The accounting treatment of rework cost depends on the

cause of the rwork.

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Accounting for Production Losses in a Process Cost System

Production losses in a process cost system include scrap, spoilage, and rework.

Normally the cost of rework should be charge to Factory Overhead Control rather than to Work in Process,

because rework in process cost system usually results from

internal failure rather than from a customer requirements.

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Accounting for Production Losses in a Process Cost System

In a process cost system, the spoilage cost is determined

on the basis of equivalent units.

As a result, the total number of equivalent units would include not only the number transferred out and the

number in ending inventory but also the number in the spoiled

units.

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Accounting for Production Losses in a Process Cost System

Normal Production Shrinkage

In some production processes, physical units are lost through evaporation or some other natural process that is not an internal quality failure.

The loss or shrinkage should be monitored to ensure that in event an internal failure does occur, it will be detected and, if possible, corrected.

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Nevertheless, such losses are not usually assigned cost on

the grounds that such cost assignment is not practical.

Instead, the total cost is absorbed by the good units the

remain.

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