Cost Accounting (14th Edition)

are the costs incurred to prevent, or the costs arising as a result of, the production of a lowquality
product. Costs of quality are classified into four categories; examples for each category
are listed in Exhibit 19-1.
1. Prevention costs—costs incurred to preclude the production of products that do not
conform to specifications
2. Appraisal costs—costs incurred to detect which of the individual units of products do
not conform to specifications
3. Internal failure costs—costs incurred on defective products before they are shipped
to customers
4. External failure costs—costs incurred on defective products after they have been
shipped to customers
The items in Exhibit 19-1 come from all business functions of the value chain, and they
are broader than the internal failure costs of spoilage, rework, and scrap described in
Chapter 18.
An important role for management accountants is preparing COQ reports for managers.
Photon determines the COQ of its photocopying machines by adapting the sevenstep
activity-based costing approach described in Chapter 5.
Step 1: Identify the Chosen Cost Object. The cost object is the quality of the photocopying
machine that Photon made and sold in 2011. Photon’s goal is to calculate the total
costs of quality of these 20,000 machines.
Step 2: Identify the Direct Costs of Quality of the Product. The photocopying machines
have no direct costs of quality because there are no resources such as inspection or repair
workers dedicated to managing the quality of the photocopying machines.
Step 3: Select the Activities and Cost-Allocation Bases to Use for Allocating Indirect
Costs of Quality to the Product. Column 1 of Exhibit 19-2, Panel A, classifies the activities
that result in prevention, appraisal, and internal and external failure costs of quality
at Photon Corporation and the business functions of the value chain in which these costs
occur. For example, the quality-inspection activity results in appraisal costs and occurs in
the manufacturing function. Photon identifies the total number of inspection-hours
(across all products) as the cost-allocation base for the inspection activity. (To avoid
details not needed to explain the concepts here, we do not show the total quantities of
each cost-allocation base.)
Step 4: Identify the Indirect Costs of Quality Associated with Each Cost-Allocation Base.
These are the total costs (variable and fixed) incurred for each of the costs-of-quality activities,
such as inspections, across all of Photon’s products. (To avoid details not needed to
understand the points described here, we do not present these total costs.)
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base. For each activity, total
costs (identified in Step 4) are divided by total quantity of the cost-allocation base (calculated
in Step 3) to compute the rate per unit of each cost-allocation base. Column 2 of
Exhibit 19-2, Panel A, shows these rates (without supporting calculations).
QUALITY AS A COMPETITIVE TOOL 673
Prevention Appraisal Internal External
Costs Costs Failure Costs Failure Costs
Design engineering Inspection Spoilage Customer support
Process engineering Online product Rework Manufacturing/
Supplier evaluations manufacturing Scrap process
Preventive equipment and process Machine repairs engineering
maintenance inspection Manufacturing/ for external
Quality training Product testing process failures
Testing of new engineering on Warranty repair
materials internal failures costs
Liability claims
Exhibit 19-1
Items Pertaining to
Costs-of-Quality
Reports