Max Electronics Corporation manufactures electronic appliances for home use. Recent market studies suggest that consumer perception of product quality is high; however, sales have declined in recent years. Analysis of the market suggests the decline in sales is due to sales price increases that were larger than competitors' price increases on comparable products. These price increases were viewed by top management as necessary to cover production costs.
Top management has always stressed the importance of quality, but most operating managers' rewards are based on objective criteria such as production volume. To guard against poor quality, products are thoroughly inspected before they are transferred from one manufacturing department to another. Defective parts that cannot be reworked are discarded, and others are reworked until they pass inspection. The cost of these activities is treated as part of normal production cost and is not separately measured and reported to management.
Required:
Criticize the company's treatment of scrap, spoilage, and rework, and explain why such costs should be measured and reported to management.