acn202 (chapter - 02)
TRANSCRIPT
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11thEditionChapter 2
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Costs Terms, Concepts andClassifications
Chapter Two
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The Product
DirectMaterials DirectLabor ManufacturingOverhead
Manufacturing Costs
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Direct Materials
Raw materials that become an integral part of theproduct and that can be conveniently traced
directly to it.
Example: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easily traced toindividual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing costs that cannotbe traced directlyto specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materials
Wages paid to employeeswho are not directly
involved in productionwork.Examples: maintenance
workers, janitors andsecurity guards.
Materials used to supportthe production process.
Examples:lubricants andcleaning supplies used in theautomobile assembly plant.
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Classifications of Costs
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
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Non-manufacturing Costs
Marketing orSelling Cost
Costs necessary to get
the order and deliverthe product.
AdministrativeCost
All executive,
organizational, andclerical costs.
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Product Costs Versus Period Costs
Product costsincludedirect materials, direct
labor, and manufacturing
overhead.
Period costsinclude allmarketing or selling
costs andadministrative costs.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
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Quick Check
Which of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany?
A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
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Quick Check
Which of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany?
A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
C i M h di i d
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Comparing Merchandising andManufacturing Activities
Merchandisers . . . Buy finished goods.
Sell finished goods.
Manufacturers . . . Buy raw materials.
Produce and sellfinished goods.
MegaLoMart
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Balance Sheet
Merchandiser
Current assets
Cash
Receivables
Prepaid Expenses
MerchandiseInventory
Manufacturer
Current Assets
Cash
ReceivablesPrepaid Expenses
InventoriesRaw Materials
Work in ProcessFinished Goods
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Balance Sheet
Merchandiser
Current assets
Cash
Receivables
Prepaid Expenses
MerchandiseInventory
Manufacturer
Current Assets
Cash
ReceivablesPrepaid Expenses
InventoriesRaw Materials
Work in ProcessFinished Goods
Partially completeproductssome
material, labor, oroverhead has been
added.
Completed productsawaiting sale.
Materials waiting tobe processed.
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The Income Statement
Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.
Manufacturing Company
Cost of goods sold: Beg. finished
goods inv. 14,200$
+ Cost of goods
manufactured 234,150
Goods available
for sale 248,350$- Ending
finished goods
inventory (12,100)
= Cost of goods
sold 236,250$
Merchandising Company
Cost of goods sold: Beg. merchandise
inventory 14,200$
+ Purchases 234,150
Goods available
for sale 248,350$
- Ending merchandise
inventory (12,100)
= Cost of goods
sold 236,250$
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Inventory Flows
Beginningbalance
$$
Additions$$$+
Available$$$$$=
Endingbalance
$$=
Withdrawals$$$
_Available$$$$$
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Quick Check
If your inventory balance at the beginning of themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what wouldbe the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
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Quick Check
If your inventory balance at the beginning of themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what wouldbe the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
$1,000 + $100 = $1,100$1,100 - $300 = $800
S h d l f C t f G d
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Schedule of Cost of GoodsManufactured
Calculates the cost of rawmaterial, direct labor andmanufacturing overhead
used in production.
Calculates the manufacturingcosts associated with goodsthat were finished during the
period.
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Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory
+ Raw materials purchased
= Raw materials
available for use
in production
Ending raw materials
inventory= Raw materials used
in production
As items are removed from rawmaterials inventory and placed into
the production process, they arecalled direct materials.
Product Cost Flows
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Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overhead purchased = Total manufacturing
= Raw materials costs
available for use
in production
Ending raw materials
inventory= Raw materials used
in production
Conversioncosts are costs
incurred toconvert thedirect materialinto a finished
product.
Product Cost Flows
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Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending raw materials
inventory= Raw materials used
in production
Product Cost Flows
All manufacturing costs incurredduring the period are added to thebeginning balance of work in
process.
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Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending work in
process inventory= Cost of goods
manufactured
Product Cost Flows
Costs associated with the goods thatare completed during the period are
transferred to finished goodsinventory.
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Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory+ Manufacturing costs + Cost of goods for the period manufactured
= Total work in process = Cost of goods for the period available for sale
Ending work in - Ending finished
process inventory goods inventory= Cost of goods Cost of goods
manufactured sold
Product Cost Flows
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Manufacturing Cost Flows
FinishedGoods
Cost of
GoodsSold
Selling andAdministrative
Period CostsSelling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
IncomeStatementExpenses
Material Purchases Raw Materials
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Quick Check
Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the monthrevealed that $28,000 of raw material was stillpresent. What is the cost of direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
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Quick Check
Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the monthrevealed that $28,000 of raw material was stillpresent. What is the cost of direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Beg. raw materials 32,000$
+ Raw materials
purchased 276,000
= Raw materials available
for use in production 308,000$ Ending raw materials
inventory 28,000
= Raw materials used
in production 280,000$
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Quick Check
Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were
total manufacturing costs incurred for themonth?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
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Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were
total manufacturing costs incurred for themonth?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Direct Materials 280,000$
+ Direct Labor 375,000
+ Mfg. Overhead 180,000
= Mfg. Costs Incurred for the Month 835,000$
Quick Check
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Quick Check
Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of
partially finished goods remaining in workin process inventory at the end of themonth. What was the cost of goodsmanufactured during the month?
A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.
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Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of
partially finished goods remaining in workin process inventory at the end of themonth. What was the cost of goodsmanufactured during the month?
A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.
Quick Check
Beginning work in process inventory 125,000$
+ Mfg. costs incurred for the period 835,000
= Total work in process during the period 960,000$
Ending work in process inventory 200,000
= Cost of goodsmanufactured 760,000$
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Quick Check
Beginning finished goods inventory was$130,000. The cost of goods manufacturedfor the month was $760,000. And the ending
finished goods inventory was $150,000.What was the cost of goods sold for themonth?
A. $ 20,000.
B. $740,000.C. $780,000.
D. $760,000.
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Quick Check
Beginning finished goods inventory was$130,000. The cost of goods manufacturedfor the month was $760,000. And the ending
finished goods inventory was $150,000.What was the cost of goods sold for themonth?
A. $ 20,000.
B. $740,000.C. $780,000.
D. $760,000.
$130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
Cost Classifications for Predicting Cost
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Cost Classifications for Predicting CostBehavior
How a cost will react tochanges in the level of
activity within the
relevant range. Total variable costs
change when activitychanges.
Total fixed costsremainunchanged when activitychanges.
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Total Variable Cost
Your total long distancetelephone bill is basedon how many minutes you talk.
Minutes Talked
TotalL
ongDistance
TelephoneBill
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Variable Cost Per Unit
Minutes Talked
Pe
rMinute
Teleph
oneCharge
The cost per long distance minutetalked isconstant. For example, 10 cents per minute.
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Total Fixed Cost
Your monthly basic telephone billprobablydoes not change when you make more local
calls.
Number of Local Calls
Mon
thlyBasic
Tele
phoneBill
Fi d C P U i
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Fixed Cost Per Unit
Number of Local Calls
Monthly
BasicTelephone
Billp
erLocalCall
The average fixed cost per local calldecreasesas more local calls are made.
Cost Classifications for Predicting Cost
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Cost Classifications for Predicting CostBehavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Q i k Ch k
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Quick Check
Which of the following costs would be variable withrespect to the number of cones sold at a Baskins &Robbins shop? (There may be more than onecorrect answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Q i k Ch k
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Quick Check
Which of the following costs would be variable withrespect to the number of cones sold at a Baskins &Robbins shop? (There may be more than onecorrect answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
A i i C t t C t Obj t
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Assigning Costs to Cost Objects
Direct costs
Costs that can beeasily and convenientlytraced to a unit of product
or other cost object. Examples: direct material
and direct labor
Indirect costs
Costs that cannot be easilyand conveniently traced toa unit of product or other
cost object. Example: manufacturing
overhead
Cost Classifications for Decision
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Every decision involves a choice between atleast two alternatives.
Only those costs and benefits that differbetween alternatives are relevant in a decision.All other costs and benefits can and should be
ignored.
Cost Classifications for DecisionMaking
Diff ti l C t d R
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Differential Costs and Revenues
Costs and revenues that differ amongalternatives.
Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.
Differential revenue is:$2,000$1,500 = $500
Differential cost is:
$300
O t it C t
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Opportunity Costs
The potential benefit that is givenup when one alternative isselected over another.
Example: If you werenot attending college,you could be earning
$15,000 per year.Your opportunity costof attending college forone year is $15,000.
S k C t
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Sunk Costs
Sunk costs have already been incurred and cannot bechanged now or in the future. They should be
ignored when making decisions.
Example: You bought an automobile that cost$10,000 two years ago. The $10,000 cost is sunkbecause whether you drive it, park it, trade it, or sellit, you cannot change the $10,000 cost.
Q i k Ch k
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Quick Check
Suppose you are trying to decide whether to driveor take the train to Portland to attend a concert. Youhave ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the trainticket relevant in this decision? In other words,should the cost of the train ticket affect the decisionof whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Q ick Check
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Quick Check
Suppose you are trying to decide whether to driveor take the train to Portland to attend a concert. Youhave ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the trainticket relevant in this decision? In other words,should the cost of the train ticket affect the decisionof whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Quick Check
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Quick Check
Suppose you are trying to decide whether to driveor take the train to Portland to attend a concert. Youhave ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost oflicensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check
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Quick Check
Suppose you are trying to decide whether to driveor take the train to Portland to attend a concert. Youhave ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check
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Quick Check
Suppose that your car could be sold now for$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check
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Quick Check
Suppose that your car could be sold now for$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Summary of the Types of Cost
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Summary of the Types of CostClassifications
Financial reporting
Predicting cost behavior
Assigning costs to cost objects
Decision making
Idle Time
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Idle Time
The labor costs incurredduring idle time are ordinarilytreated as manufacturing
overhead.
MachineBreakdowns
MaterialShortages
PowerFailures
Overtime
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Overtime
The overtime premiums for all factoryworkers are usually considered to be part
of manufacturing overhead.
Labor Fringe Benefits
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Labor Fringe Benefits
Fringe benefits include employer paidcosts for insurance programs, retirement
plans, supplemental unemployment
programs, Social Security, Medicare,workers compensation andunemployment taxes.
Some companiesinclude all of these
costs inmanufacturing
overhead.
Other companies treatfringe benefit
expenses of directlaborers as additional
direct labor costs.
Quality of Conformance
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Quality of Conformance
When the overwhelming majority ofproducts produced conform to design
specifications and are free from
defects.
Prevention and Appraisal Costs
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Prevention and Appraisal Costs
PreventionCosts
Support activitieswhose purpose is toreduce the number of
defects
Appraisal Costs
Incurred to identifydefective products
before the products areshipped
Internal and External Failure Costs
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Internal and External Failure Costs
Internal FailureCosts
Incurred as a result ofidentifying defects
before they are shipped
External FailureCosts
Incurred as a result ofdefective productsbeing delivered to
customers
Examples of Quality Costs
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Examples of Quality Costs
Prevention CostsQuality trainingQuality circlesStatistical processcontrol activities
Appraisal CostsTesting & inspecting
incoming materialsFinal product testingDepreciation of testing
equipment
Internal Failure CostsScrapSpoilageRework
External Failure Costs
Cost of field servicing &handling complaints
Warranty repairsLost sales
Distribution of Quality Costs
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Distribution of Quality Costs
When quality of conformance is low,total quality cost is high and consistsmostly of internal and external failure.
Companies can reducetheir total quality cost by
focusing on prevention andappraisal. The cost savings
from reduced defectsusually swamps the costs
of the additional preventionand appraisal efforts.
Ventura CompanyQuality Cost Report
For Years 1 and 2
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Quality costreports providean estimate of
the financialconsequences
of thecompanys
current defectrate.
Amount Percent* Amount Percent*
Prevention costs:
Systems development 400,000$ 0.80% 270,000$ 0.54%
Quality training 210,000 0.42% 130,000 0.26%
Supervision of prevention activities 70,000 0.14% 40,000 0.08%
Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs:
Inspection 600,000 1.20% 560,000 1.12%
Reliability testing 580,000 1.16% 420,000 0.84%
Supervision of testing and inspection 120,000 0.24% 80,000 0.16%
Depreciation of test equipment 200,000 0.40% 140,000 0.28%
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
Internal failure costs:
Net cost of scrap 900,000 1.80% 750,000 1.50%
Rework labor and overhead 1,430,000 2.86% 810,000 1.62%
Downtime due to defects in quality 170,000 0.34% 100,000 0.20%
Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%
External failure costs:Warranty repairs 400,000 0.80% 900,000 1.80%
Warranty replacements 870,000 1.74% 2,300,000 4.60%
Allowances 130,000 0.26% 630,000 1.26%
Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30%
Total quality cost 7,500,000$ 15.00% 9,000,000$ 18.00%
* As a percentage of total sales. In each year sales totaled $50,000,000.
Year 2 Year 1
For Years 1 and 2
Quality Cost Reports: Graphic Form
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Quality Cost Reports: Graphic Form
$10
9
8
7
6
5
4
3
2
1Appraisal
0Prevention Prevention
1 2
Year
QualityCost(inm
illions)
Appraisal
Internal
Failure
External
Failure
Internal
Failure
External
Failure
20
18
16
14
12
10
8
6
4
2Appraisal
0Prevention Prevention
1 2
Year
QualityCostasaPercentageofSales
Appraisal
Internal
Failure
External
Failure
Internal
Failure
External
Failure
Qualityreports
can also
beprepared
ingraphic
form.
Uses of Quality Cost Information
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Uses of Quality Cost Information
Help managers see thefinancial significance of
defects.
Help managers identifythe relative importance of
the quality problems.
Help managers seewhether their quality
costs are poorly
distributed.
Limitations of Quality Cost Information
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Limitations of Quality Cost Information
Simply measuring qualitycost problems does notsolve quality problems.
Results usually lagbehind quality
improvement programs.
The most importantquality cost, lost sales, is
often omitted fromquality cost reports.
ISO 9000 Standards
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ISO 9000 Standards
ISO 9000 standards have become aninternational measure of quality. To becomeISO 9000 certified, a company must
demonstrate:
1. A quality control system is in use, and thesystem clearly defines an expected level ofquality.
2. The system is fully operational and isbacked up with detailed documentation ofquality control procedures.
3. The intended level of quality is beingachieved on a sustained basis.
End of Chapter 2
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End of Chapter 2