Ch 2 - Cost Terms, Concepts, and Classifications.ppt
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Transcript of Ch 2 - Cost Terms, Concepts, and Classifications.ppt
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2-1
Costs Terms, Concepts andClassifications
Chapter Two
Dr. Yean Rithy
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2-2
Learning Objective 1
Identify and give examplesIdentify and give examplesof each of the three basicof each of the three basic
manufacturing costmanufacturing cost
categories.categories.
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2-3
The ProductThe Product
DirectMaterials
DirectMaterials
Directabor
Directabor
Manufacturing!verhead
Manufacturing!verhead
anufacturing Costs
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2-!
"irect aterials
Raw materials that become an integral part of theproduct and that can be conveniently traced
directly to it.
#$ample% & radio installed in an automobile
#$ample% & radio installed in an automobile
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2-'
"irect Labor
Those labor costs that can be easily traced toindividual units of product.
#$ample% (ages paid to automobile assembl) *or+ers
#$ample% (ages paid to automobile assembl) *or+ers
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2-
Manufacturing costs that cannotbe traced directlyto specific units produced.
anufacturing Overhead
#$amples% ndirect labor and indirect materials
#$amples% ndirect labor and indirect materials
(ages paid to emplo)ees*ho are not directl)
involved in production*or+.#$amples% maintenance
*or+ers, janitors andsecurit) guards.
aterials used to supportthe production process.
#$amples%lubricants andcleaning supplies used in theautomobile assembl) plant.
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Learning Objective 2
Distinguish betweenDistinguish betweenproduct costs and periodproduct costs and period
costs and give examplescosts and give examplesof each.of each.
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2-4
Product Costs 5ersus Period Costs
Product costsincludedirect materials, direct
labor, and
manufacturingoverhead.
Period costsinclude allselling costs and
administrative costs.
nventor) Cost of 6ood old
"alance#heet
Income#tatement
Sale
#$pense
Income#tatement
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2-17
8uic+ Chec+
$hich of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany%
&. Manufacturing e'uipment depreciation.". (roperty taxes on corporate head'uarters.
C. Direct materials costs.
D. )lectrical costs to light the production
facility.
). #ales commissions.
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2-11
8uic+ Chec+
$hich of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany%
&. Manufacturing e'uipment depreciation.". (roperty taxes on corporate head'uarters.
C. Direct materials costs.
D. )lectrical costs to light the production
facility.
). #ales commissions.
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2-12
Classifications of Costs
DirectMaterialDirect
MaterialDirectaborDirectabor
Manufacturing!verhead
Manufacturing!verhead
(rimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows*
C i h di i d
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2-13 Comparing erchandising andanufacturing &ctivities
erchandisers . . . 9u) finished goods.
ell finished goods.
anufacturers . . . 9u) ra* materials.
Produce and sellfinished goods.
egaLoart
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2-1!
9alance heet
erchandiser
Current assetsCash
:eceivables
Prepaid #$penses
erchandise
nventor)
anufacturer
Current &ssets Cash
:eceivables
Prepaid #$penses
nventories+ :a* aterials
+ (or+ in Process
+ ;inished 6oods
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2-1'
erchandiser
Current assetsCash
:eceivables
Prepaid #$penses
erchandise
nventor)
anufacturer
Current &ssets Cash
:eceivables
Prepaid #$penses
nventories+ :a* aterials
+ (or+ in Process
+ ;inished 6oods
9alance heet
Partiall) completeproducts < some
material, labor, oroverhead has been
added.
Completed products
a*aiting sale.
aterials *aiting tobe processed.
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2-1
Learning Objective 3
(repare an income(repare an income
statement includingstatement includingcalculation of the cost ofcalculation of the cost of
goods sold.goods sold.
2 1/
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2-1/
The ncome tatement
Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.
erchandising Compan)
Cost of goods sold% 9eg. merchandise
inventor) 1!,277=
> Purchases 23!,1'7
6oods available
for sale 2!,3'7=
- #nding merchandise
inventor) ?12,177@
A Cost of goods
sold 23,2'7=
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2-1
9asic #Buation for nventor) &ccounts
9eginning
balance
9eginningbalance
&dditions
to inventor)
&dditionsto inventor)+ =
#ndingbalance
#ndingbalance
(ithdra*alsfrom
inventor)
(ithdra*alsfrom
inventor)
+
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2-14
8uic+ Chec+
If your inventory balance at the beginning of themonth was ,-/// you bought ,-// during themonth and sold ,0// during the month what wouldbe the balance at the end of the month%
&. ,-///.
". , 1//.
C. ,-2//.
D. , 2//.
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2-27
8uic+ Chec+
If your inventory balance at the beginning of themonth was ,-/// you bought ,-// during themonth and sold ,0// during the month what wouldbe the balance at the end of the month%
&. ,-///.
". , 1//.
C. ,-2//.
D. , 2//.
,-/// 3 ,-// 4 ,--//,--// 5 ,0// 4 ,1//
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2-21
Learning Objective !
(repare a schedule of cost(repare a schedule of costof goods manufactured.of goods manufactured.
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chedule of Cost of 6oods anufactured
Calculates the cost of ra*material, direct labor and
manufacturing overhead used
in production.
Calculates the manufacturingcosts associated *ith goodsthat *ere finished during the
period.
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2 23
anufacturing (or+
:a* aterials Costs n Process
9eginning ra* "irect materials
materials inventor)
> :a* materials purchased
A :a* materials
available for use
in production
< #nding ra* materials
inventor)A :a* materials used
in production
&s items are removed from ra*materials inventor) and placed into
the production process, the) arecalled direct materials.
&s items are removed from ra*materials inventor) and placed into
the production process, the) arecalled direct materials.
Product Cost ;lo*s
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2 2!
anufacturing (or+
:a* aterials Costs n Process
9eginning ra* "irect materials
materials inventor) > "irect labor
> :a* materials > fg. overhead purchased A Total manufacturing
A :a* materials costs
available for use
in production
< #nding ra* materials
inventor)A :a* materials used
in production
Conversioncosts are costs
incurred toconvert thedirect materialinto a finished
product.
Conversioncosts are costs
incurred toconvert thedirect materialinto a finished
product.
Product Cost ;lo*s
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2 2'
anufacturing (or+
:a* aterials Costs n Process
9eginning ra* "irect materials 9eginning *or+ in
materials inventor) > "irect labor process inventor)
> :a* materials > fg. overhead > Total manufacturing purchased A Total manufacturing costs
A :a* materials costs A Total *or+ in
available for use process for the
in production period
< #nding ra* materials
inventor)A :a* materials used
in production
Product Cost ;lo*s
&ll manufacturing costs incurredduring the period are added to the
beginning balance of *or+ inprocess.
&ll manufacturing costs incurredduring the period are added to thebeginning balance of *or+ in
process.
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anufacturing (or+
:a* aterials Costs n Process
9eginning ra* "irect materials 9eginning *or+ in
materials inventor) > "irect labor process inventor)
> :a* materials > fg. overhead > Total manufacturing
purchased A Total manufacturing costs
A :a* materials costs A Total *or+ in
available for use process for the
in production period
< #nding ra* materials < #nding *or+ in
inventor) process inventor)A :a* materials used A Cost of goods
in production manufactured
Product Cost ;lo*s
Costs associated *ith the goods thatare completed during the period are
transferred to finished goodsinventor).
Costs associated *ith the goods thatare completed during the period are
transferred to finished goodsinventor).
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Product Cost ;lo*s
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anufacturing Cost ;lo*s
;inished6oods
Cost of
6oodsold
elling and&dministrative
(eriod Costselling and&dministrative
anufacturingOverhead
(or+ inProcess
"irect Labor
"alance #heet Costs Inventories
Income#tatement)xpenses
aterial Purchases :a* aterials
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8uic+ Chec+
"eginning raw materials inventory was ,02///.During the month ,267/// of raw material waspurchased. & count at the end of the monthrevealed that ,21/// of raw material was stillpresent. $hat is the cost of direct material used%
&. ,267///
". ,262///
C. ,21////
D. , 2///
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8uic+ Chec+
"eginning raw materials inventory was ,02///.During the month ,267/// of raw material waspurchased. & count at the end of the monthrevealed that ,21/// of raw material was stillpresent. $hat is the cost of direct material used%
&. ,267///
". ,262///
C. ,21////
D. , 2///
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8uic+ Chec+
Direct materials used in production totaled,21////. Direct labor was ,068/// andfactory overhead was ,-1////. $hat were
total manufacturing costs incurred for themonth%
&. ,888///
". ,108///C. ,788///
D. Cannot be determined.
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Direct materials used in production totaled,21////. Direct labor was ,068/// andfactory overhead was ,-1////. $hat were
total manufacturing costs incurred for themonth%
&. ,888///
". ,108///C. ,788///
D. Cannot be determined.
8uic+ Chec+
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8uic+ Chec+
"eginning wor9 in process was ,-28///.Manufacturing costs incurred for the monthwere ,108///. There were ,2///// of
partially finished goods remaining in wor9in process inventory at the end of themonth. $hat was the cost of goodsmanufactured during the month%
&. ,--7////". , :-////C. , 67////D. Cannot be determined.
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"eginning wor9 in process was ,-28///.Manufacturing costs incurred for the monthwere ,108///. There were ,2///// of
partially finished goods remaining in wor9in process inventory at the end of themonth. $hat was the cost of goodsmanufactured during the month%
&. ,--7////". , :-////C. , 67////D. Cannot be determined.
8uic+ Chec+
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8uic+ Chec+
"eginning finished goods inventory was,-0////. The cost of goods manufacturedfor the month was ,67////. &nd the ending
finished goods inventory was ,-8////.$hat was the cost of goods sold for themonth%
&. , 2////.
". ,6;////.C. ,61////.
D. ,67////.
2-3
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8uic+ Chec+
"eginning finished goods inventory was,-0////. The cost of goods manufacturedfor the month was ,67////. &nd the ending
finished goods inventory was ,-8////.$hat was the cost of goods sold for themonth%
&. , 2////.
". ,6;////.C. ,61////.
D. ,67////.
,-0//// 3 ,67//// 4 ,1:////
,1://// 5 ,-8//// 4 ,6;////
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Learning Objective '
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Cost Classifications for Predicting Cost9ehavior
=ow a cost will react tochanges in the level of
activity within the
relevant range. Total variable costs
change when activitychanges.
Total fi$ed costsremainunchanged when activitychanges.
=ow a cost will react tochanges in the level of
activity within the
relevant range. Total variable costs
change when activitychanges.
Total fi$ed costsremainunchanged when activitychanges.
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5ariable Cost
Your total long distancetelephone bill is basedon how many minutes you tal9.
Minutes Tal9ed
Total
ongDistance
Telephone"ill
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5ariable Cost Per nit
Minutes Tal9ed
(e
rMinute
TelephoneCharge
The cost per long distance minutetal9ed isconstant. >or example -/ cents per minute.
2-!1
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;i$ed Cost
Your monthly basic telephone billprobablydoes not change when you ma9e more local
calls.
?umber of ocal Calls
Monthly"asic
Tele
phone"ill
2-!2
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;i$ed Cost Per nit
?umber of ocal Calls
Monthly
"asicTeleph
one
"illp
erocalCall
The average fixed cost per local calldecreasesas more local calls are made.
2-!3 Cost Classifications for Predicting Cost
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Cost Classifications for Predicting Cost9ehavior
9ehavior of Cost ?*ithin the relevant range@
Cost n Total Per nit
5ariable Total variable cost changes 5ariable cost per unit remainsas activit) level changes. the same over *ide ranges
of activit).
;i$ed Total fi$ed cost remains &verage fi$ed cost per unit goes
the same even *hen the do*n as activit) level goes up.
activit) level changes.
2-!!
8 i + Ch +
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8uic+ Chec+
$hich of the following costs would be variable withrespect to the number of cones sold at a "as9ins @Robbins shop% AThere may be more than onecorrect answer.B
&. The cost of lighting the store.
". The wages of the store manager.
C. The cost of ice cream.
D. The cost of nap9ins for customers.
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8 i + Ch +
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8uic+ Chec+
$hich of the following costs would be variable withrespect to the number of cones sold at a "as9ins @Robbins shop% AThere may be more than onecorrect answer.B
&. The cost of lighting the store.
". The wages of the store manager.
C. The cost of ice cream.
D. The cost of nap9ins for customers.
2-!
L i Obj ti
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Learning Objective
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&ssigning Costs to Cost Objects
"irect costs
Costs that can beeasil) and convenientl)traced to a unit of
product or other costobject.
#$amples% directmaterial and direct labor
ndirect costs
Costs that cannot beeasil) and convenientl)traced to a unit of
product or other costobject.
#$ample% manufacturingoverhead
2-!
L i Obj ti /
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Learning Objective /
Define and give examplesDefine and give examples
of cost classifications usedof cost classifications used
in ma9ing decisions*in ma9ing decisions*differential costsdifferential costs
opportunity costs andopportunity costs and
sun9 costs.sun9 costs.
2-!4
C t Cl ifi ti f " i i +i
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)very decision involves a choice between atleast two alternatives.
!nly those costs and benefits that differbetween alternatives are relevant in a decision.&ll other costs and benefits can and should be
ignored.
Cost Classifications for "ecision a+ing
2-'7
"ifferential Cost and :evenue
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"ifferential Cost and :evenue
Costs and revenues that differ amongCosts and revenues that differ amongalternatives.alternatives.
#$ample% Dou have a job pa)ing =1,'77 per month in)our hometo*n. Dou have a job offer in a neighboringcit) that pa)s =2,777 per month. The commuting costto the cit) is =377 per month.
#$ample% Dou have a job pa)ing =1,'77 per month in)our hometo*n. Dou have a job offer in a neighboringcit) that pa)s =2,777 per month. The commuting costto the cit) is =377 per month.
"ifferential revenue is%=2,777 < =1,'77 A ='77
"ifferential cost is%
=377
2-'1
Opportunit) Cost
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Opportunit) Cost
The potential benefit that isgiven up *hen one
alternative is selected overanother.
)xample* If you werenot attending collegeyou could be earning
,-8/// per year.Your opportunity costof attending college forone year is ,-8///.
2-'2
un+ Costs
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un+ Costs
un+ costs have alread) been incurred and cannot bechanged no* or in the future. The) should be ignored
*hen ma+ing decisions.
)xample* You bought an automobile that cost,-//// two years ago. The ,-//// cost is sun9because whether you drive it par9 it trade it or sell
it you cannot change the ,-//// cost.
2-'3
8uic+ Chec+
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8uic+ Chec+
#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the cost of the traintic9et relevant in this decision% In other wordsshould the cost of the train tic9et affect the decisionof whether you drive or ta9e the train to (ortland%
&. Yes the cost of the train tic9et is relevant.
". ?o the cost of the train tic9et is not relevant.
2-'!
8uic+ Chec+
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8uic+ Chec+
#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the cost of the traintic9et relevant in this decision% In other wordsshould the cost of the train tic9et affect the decisionof whether you drive or ta9e the train to (ortland%
&. Yes the cost of the train tic9et is relevant.
". ?o the cost of the train tic9et is not relevant.
2-''
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8uic+ Chec+
#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the annual cost oflicensing your car relevant in this decision%
&. Yes the licensing cost is relevant.
". ?o the licensing cost is not relevant.
2-'
8uic+ Chec+
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8uic+ Chec+
#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the annual cost oflicensing your car relevant in this decision%
&. Yes the licensing cost is relevant.
". ?o the licensing cost is not relevant.
2-'/
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8uic+ Chec+
#uppose that your car could be sold now for,8///. Is this a sun9 cost%
&. Yes it is a sun9 cost.
". ?o it is not a sun9 cost.
2-'
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8uic+ Chec+
#uppose that your car could be sold now for,8///. Is this a sun9 cost%
&. Yes it is a sun9 cost.
". ?o it is not a sun9 cost.
2-'4 ummar) of the T)pes of Cost
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) )pClassifications
>inancial reporting
(redicting cost behavior
&ssigning costs to cost obects
Decision ma9ing
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;urther Classification of LaborCosts
&ppendix 2&
2-1
Learning Objective
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Learning Objective
A&ppendix 2&BA&ppendix 2&B
(roperly account for labor(roperly account for laborcosts associated with idlecosts associated with idle
time overtime and fringetime overtime and fringe
benefits.benefits.
2-2
dle Time
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dle Time
The labor costs incurredduring idle time are ordinaril)treated as manufacturing
overhead.
achine9rea+do*ns
aterialhortages
Po*er ;ailures
2-3
Overtime
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Overtime
The overtime premiums for all factor)*or+ers are usuall) considered to be part
of manufacturing overhead.
2-!
Labor ;ringe 9enefits
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Labor ;ringe 9enefits
;ringe benefits include emplo)er paidcosts for insurance programs, retirement
plans, supplemental unemplo)ment
programs, ocial ecurit), edicare,*or+ersE compensation andunemplo)ment ta$es.
ome companiesinclude all of these
costs inmanufacturing
overhead.
Other companies treatfringe benefit
e$penses of directlaborers as additional
direct labor costs.
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Cost of 8ualit)
&ppendix 2"
2-
Learning Objective 4
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Learning Objective 4
A&ppendix 2"BA&ppendix 2"B
Identify the four types ofIdentify the four types of'uality costs and explain'uality costs and explain
how they interact.how they interact.
2-/
8ualit) of Conformance
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8ualit) of Conformance
(hen the over*helming majorit) ofproducts produced conform to design
specifications and are free from
defects.
2-
Prevention and &ppraisal Costs
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Prevention and &ppraisal Costs
PreventionCosts
upport activities *hosepurpose is to reduce the
number of defects
&ppraisal Costsncurred to identif)
defective products beforethe products are shipped
2-4
nternal and #$ternal ;ailure Costs
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nternal and #$ternal ;ailure Costs
nternal ;ailureCosts
ncurred as a result ofidentif)ing defects
before the) are shipped
#$ternal ;ailureCosts
ncurred as a result ofdefective products beingdelivered to customers
2-/7
#$amples of 8ualit) Costs
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#$amples of 8ualit) Costs
Prevention Costs+8ualit) training+8ualit) circles+tatistical processcontrol activities
&ppraisal Costs+Testing F inspecting
incoming materials+;inal product testing+"epreciation of testing
eBuipment
nternal ;ailure Costs+crap+poilage+:e*or+
#$ternal ;ailure Costs
+Cost of field servicing Fhandling complaints
+(arrant) repairs+Lost sales
2-/1
"istribution of 8ualit) Costs
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"istribution of 8ualit) Costs
(hen Bualit) of conformance is lo*, total
Bualit) cost is high and consists mostl) ofinternal and e$ternal failure.
Total Bualit) costs drop rapidl) as the Bualit)of conformance increases.
Companies reduce their total Bualit) costs b)focusing their efforts on prevention andappraisal because the cost savings fromreduced defects usuall) over*helm the
costs of additional prevention andappraisal.
Total Bualit) costs are minimied *hen theBualit) of conformance is slightl) less
than 177G.
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Learning Objective 17
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Learning Objective 17
A&ppendix 2"BA&ppendix 2"B
(repare and interpret a(repare and interpret a'uality cost report.'uality cost report.
2-/3
Dear 2 Dear 1
8ualit) Cost :eport;or Dears 1 and 2
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8ualit) costreports providean estimate of
the financialconseBuences
of thecompan)Es
current defectrate.
&mount PercentH &mount PercentH
(revention costs*
#ystems development ;/////, /.1/E 26////, /.8;E
Fuality training 2-//// /.;2E -0//// /.27E
#upervision of prevention activities 6//// /.-;E ;//// /./1E
Fuality improvement 02//// /.7;E 2-//// /.;2ETotal prevention cost -////// 2.//E 78//// -.0/E
&ppraisal costs*
Inspection 7///// -.2/E 87//// -.-2E
Reliability testing 81//// -.-7E ;2//// /.1;E
#upervision of testing and inspection -2//// /.2;E 1//// /.-7E
Depreciation of test e'uipment 2///// /.;/E -;//// /.21E
Total appraisal cost -8///// 0.//E -2///// 2.;/E
Internal failure costs *
?et cost of scrap :///// -.1/E 68//// -.8/E
Rewor9 labor and overhead -;0//// 2.17E 1-//// -.72E
Downtime due to defects in 'uality -6//// /.0;E -///// /.2/E
Disposal of defective products 8///// -.//E 0;//// /.71E
Total internal failure cost 0////// 7.//E 2////// ;.//E
)xternal failure costs*
$arranty repairs ;///// /.1/E :///// -.1/E
$arranty replacements 16//// -.6;E 20///// ;.7/E
&llowances -0//// /.27E 70//// -.27E
Cost of field servicing 7///// -.2/E -02//// 2.7;E
Total external failure cost 2////// ;.//E 8-8//// -/.0/E
Total 'uality cost 68/////, -8.//E ://////, -1.//E
G &s a percentage of total sales. In each year sales totaled ,8///////.
2-/!
8ualit) Cost :eports in 6raphic ;orm
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8ualit) Cost :eports in 6raphic ;orm
=17
4
/
'
!
3
2
1&ppraisal
7Prevention Prevention
1 2
Dear
8ualit)Cost?inm
illions@
&ppraisal
nternal
;ailure
#$ternal
;ailure
nternal
;ailure
#$ternal
;ailure
27
1
1
1!
12
17
!
2&ppraisal
7Prevention Prevention
1 2
Dear
8uali
t)CostasaPercentageof1ales
&ppraisal
nternal
;ailure
#$ternal
;ailure
nternal
;ailure
#$ternal
;ailure
8ualit)reportscan also
beprepared
ingraphicform.
2-/'
ses of 8ualit) Cost nformation
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8 )
Ielp managers see thefinancial significance of
defects.
Ielp managers identif)the relative importanceof the Bualit) problems.
Ielp managers see*hether their Bualit)
costs are poorl)distributed.
2-/
Limitations of 8ualit) Cost nformation
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8 )
impl) measuring Bualit)cost problems does notsolve Bualit) problems.
:esults usuall) lagbehind Bualit)
improvement programs.
The most importantBualit) cost, lost sales, is
often omitted fromBualit) cost reports.
2-//
O 4777 tandards
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O 4777 standards have becomeinternational measures of Bualit).
To become O 4777 certified, acompan) must demonstrate%
1. & Bualit) control s)stem is in use, and thes)stem clearl) defines an e$pected level ofBualit).
2. The s)stem is full) operational and is
bac+ed up *ith detailed documentation ofBualit) control procedures.
3. The intended level of Bualit) is beingachieved on a sustained basis.
2-/
#nd of Chapter 2
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p