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Managerial Accounting: Quality Improvement Programs, Facilities Layout and Cost-of-Quality Report Questions

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Quality improvement programs and cost savings Garber Valves Company manufactures brass valves meeting precise specification standards. All finished valves are inspected before packing and shipping to customers. Rejected valves are returned to the initial production stage to be meted and recast. Such rework requires no new materials in casting but requires new materials in finishing. The following unit cost data are available (see attached)

As a result of a quality-improvement program, the reject rate has decreased from 64% to 5.1%, and the number of rejects has decreased by (6.4% - 5.1%) x 10,000 units. Improvements in reject rates have also led to a decrease in work-in-process inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% per year. Estimate the annual cost savings as a result fo the quality improvement.

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Facilities Layout One aspect of facilities layout for McDonald's is that when customers come into the building they can line up in one of several lines and wait to be served. In contrast, customers at Wendy's are asked to stand in one line that snakes around the front of the counter and wait for a single server.

a. What is the rationale for each approach?
b. Which approach do you favor from (1) a customer's perspective and (2) management's perspective? Explain.

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Preparing a cost-of-quality report The following information (see attached) shows last year's quality-related costs for the Renwal Company.

a. Prepare a cost-of-quality report grouping costs into prevention, appraisal, internal failure, and external failure. Also show costs as a percent of sales.
b. Interpret the data and make recommendations to Renwal's management.

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