Cost Accounting (14th Edition)

674 CHAPTER 19 BALANCED SCORECARD: QUALITY, TIME, AND THE THEORY OF CONSTRAINTS
Exhibit 19-2
Analysis of Activity-Based Costs of Quality (COQ) for Photocopying Machines at
Photon Corporation
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A
PANEL A: ACCOUNTING COQ REPORT
B C D E
F
G
Percentage of
Cost Allocation Quantity of Cost Total Revenues
Cost of Quality and Value-Chain Category Rate a Allocation Base Costs (5) = (4) ÷
(1)
Prevention costs
(2) (3) (4) = (2) x (3) $300,000,000
Design engineering (R&D/Design) $ 80 per hour 40,000 hours $ 3,200,000 1.1%
Process engineering (R&D/Design) $ 60 per hour 45,000 hours 2,700,000 0.9%
Total prevention costs 5,900,000 2.0%
Appraisal costs
Inspection (Manufacturing) $ 40 per hour 240,000 hours 9,600,000 3.2%
Total appraisal costs 9,600,000 3.2%
Internal failure costs
Rework (Manufacturing) $100 per hour 100,000 hours 10,000,000 3.3%
Total internal failure costs 10,000,000 3.3%
External failure costs
Customer support (Marketing) $ 50 per hour 12,000 hours 600,000 0.2%
Transportation (Distribution) $240 per load 3,000 loads 720,000 0.2%
Warranty repair (Customer service) $110 per hour 120,000 hours 13,200,000 4.4%
Total external failure costs 14,520,000 4.8%
Total costs of quality $ 40,020,000 13.3%
a Calculations not shown.
PANEL B: OPPORTUNITY COST ANALYSIS
Cost of
Quality Category
(1)
External failure costs
Estimated forgone contribution margin
Total Estimated
Contribution
Margin Lost
(2)
Percentage
of Revenues
(3) = (2) ÷
$300,000,000
a nd income on lost sales
$ 12,000,000 4.0%
Total external failure costs $ 12,000,000 4.0%
b Calculated as total revenues minus all variable costs (whether output-unit, batch, product-sustaining, or facility-sustaining) on
lost sales in 2011. If poor quality causes Photon to lose sales in subsequent years as well, the opportunity costs will be
even greater.
b
Step 6: Compute the Indirect Costs of Quality Allocated to the Product. The indirect
costs of quality of the photocopying machines, shown in Exhibit 19-2, Panel A, column 4,
equal the cost-allocation rate from Step 5 (column 2) multiplied by the total quantity of
the cost-allocation base used by the photocopying machines for each activity (column 3).
For example, inspection costs for assuring the quality of the photocopying machines are
$9,600,000 ($40 per hour * 240,000 inspection-hours).
Step 7: Compute the Total Costs of Quality by Adding All Direct and Indirect Costs of
Quality Assigned to the Product. Photon’s total costs of quality in the COQ report for
photocopying machines is $40.02 million (Exhibit 19-2, Panel A, column 4) or 13.3% of
current revenues (column 5).