Measuring Quality Costs. Hightone Electronics Corporation manufactures electronic appliances for home use. Recent market studies suggest that con¬ sumer perception of the quality of Hightone products is high; however, sales have declined in the past few years. Analysis of the market suggests that the decline in sales volume is the result of larger increases in sales prices for Hightone’s products relative to increases by competitors for products of comparable quality. These price increases were viewed as necessary by Hightone’s top management in order to cover increas¬ ing production costs.

Top management has always stressed the importance of quality, but for the most part rewards to operating managers have been based on objective criteria such as production volume. To guard against poor production quality, products are thoroughly inspected before they are transferred from one manufacturing department to another. Defective or broken parts that cannot be reworked are discarded, and defective products are reworked until they pass inspection. The cost of these activities is treated as part of normal departmental pro¬ duction cost, with the implication that such costs are not separately measured and reported to management. LO6 Required: Criticize Hightone’s treatment of scrap, spoilage, and rework, and explain why such costs should be measured and reported to management.