Matakuliah
Tahun
: COST ACCOUNTING
: 2009
Chapter 7
THE COST OF QUALITY AND
ACCOUNTING FOR PRODUCTION LOSSES
Learning 9, 10 F2F
The Cost of Quality
The cost of quality is not only the cost of obtaining quality
but also the cost incurred from a lack of quality.
Types of quality costs:
1. Prevention costs, are the costs incurred to prevent
product failure. For example: costs of implementing and
maintaining such systems.
2. Appraisal costs, are the costs incurred to detect product
failure. For example: cost of inspecting and testing
materials.
3. Failure costs, are the costs incurred when a product fails;
they can occur internally or externally.
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• Internally failure costs, arhas been soldhas been sold,
such as the cost of warrantye those that occur during the
production process, such as the costs of scrap, spoilage,
rework.
• Externally failure costs, are those that occur after the
product has been sold, such as the cost of warranty
repairs and replacements, the cost of handling customer
complaints, the cost of lost sales.
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To eliminate poor quality, world-class producers adopt a
total quality management philosophy.
Total Quality Management (TQM) is a company wide
approach to quality improvement that seeks to improve
quality in all processes and activities.
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There is no one quick way to achieve quality.
Quality improvement must be a continuous process .
Continuous quality improvement requires the constant
effort of every one in the company - both management and
labor - working together, and that while quality will improve
over time, the process of continual improvement never
ends and never becomes easier.
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To monitor successfully the cost of quality and evaluate
improvements, management accountants must be able to
measure the cost of quality.
Reporting quality costs also provides direction by indicating
opportunities for substantial improvement.
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Accounting for Production Losses
in a Job Order Cost System
Production losses in job order cost system include the cost
of materials scrap, spoiled goods, and reworking defective
goods.
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Accounting for Scrap
Scrap includes:
1. The fillings or trimmings remaining after processing
materials.
2. Defective materials that cannot be used or returned to
the vendor.
3. Broken parts resulting from employee or machine
failures
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Accounting for Spoiled Goods
Spoiled goods are not correctable either because
technically it is not possible to correct them or because it is
not economical to correct them.
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Accounting for Spoiled Goods
Spoilage can be caused by an act of the customer, such as
a change in specifications after production is begun or
imposition of unusually close production tolerances.
Spoilage also can be caused by an internal failure, such as
an employee error or a badly worn tool.
The accounting treatment for spoiled goods depends on
which of these two types of cause is present.
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Accounting for Rework
Rework is the process of correcting defective goods.
Rework can result from either an act of the customer or an
internal failure.
The accounting treatment of rework cost depends on the
cause of the rwork.
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Accounting for Production Losses in a Process Cost System
Production losses in a process cost system include scrap,
spoilage, and rework.
Normally the cost of rework should be charge to Factory
Overhead Control rather than to Work in Process, because
rework in process cost system usually results from internal
failure rather than from a customer requirements.
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Accounting for Production Losses in a Process Cost System
In a process cost system, the spoilage cost is determined
on the basis of equivalent units.
As a result, the total number of equivalent units would
include not only the number transferred out and the number
in ending inventory but also the number in the spoiled units.
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Accounting for Production Losses in a Process Cost System
Normal Production Shrinkage
In some production processes, physical units are lost
through evaporation or some other natural process that is
not an internal quality failure.
The loss or shrinkage should be monitored to ensure that in
event an internal failure does occur, it will be detected and,
if possible, corrected.
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Nevertheless, such losses are not usually assigned cost on
the grounds that such cost assignment is not practical.
Instead, the total cost is absorbed by the good units the
remain.
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