Costs of quality analysis, nonfinancial quality measures. The Hartono Corporation manufactures and sells industrial grinders. The following table presents financial information pertaining to quality in 2007 and 2008 (in thousands):

2008 2007 Sales $12,500 $10,000 Line inspection 85 110 Scrap 175 250 Design engineering 240 100 Cost of returned goods 145 60 Product-testing equipment 50 50 Customer support 30 40 Rework costs 135 160 Preventive equipment maintenance 90 35 Product liability claims 100 200 Incoming materials inspection 40 20 Breakdown maintenance 40 90 Product-testing labour 75 220 Training 120 45 Warranty repair 200 300 Supplier evaluations 50 20 Required 1. Classify the cost items in the table into prevention, appraisal, internal failure, or external failure categories.

2. Calculate the ratio of each COQ category to sales in 2007 and 2008. Comment on the trends in costs of quality between 2007 and 2008.

3. Give two examples of nonfinancial quality measures that Hartono Corporation could CHAPTER 19 monitor as part of a total quality control effort.

Excel Application For students who wish to practise their spreadsheet skills, the following is a step-by-step approach to creating an Excel spreadsheet to work this problem.
Step-by-Step 1. Open a new spreadsheet. Create a row for “Revenues” and columns for “2008” and “2007.”
(Program your spreadsheet to perform all necessary calculations. Do not “hard-code” any amounts, such as prevention costs as a percentage of sales, requiring addition, subtraction, multiplication, or division operations.)
2. Skip two rows and create columns for “Cost” and “Cost as a Percentage of Revenues” for 2008. Create two more columns right next to these columns for “Cost” and “Cost as a Percentage of Revenues” for 2007. Create rows for each item of prevention costs (for example, “Preventive Maintenance”) and “Total Prevention Costs”; each item of appraisal costs and “Total Appraisal Costs”; each item of internal failure costs and “Total Internal Failure Costs”; and each item of external failure costs and “Total External Failure Costs.”
Finally, create a row for “Total Costs of Quality.”
3. Enter calculations for total cost of a Percentage ofRevenues of each Cost of Quality category (for example, total prevention costs) and Total Costs of Quality in 2007 and 2008.
4. Skip two rows and create a section, “COQ Trend Analysis,” with rows for “Prevention Costs, Appraisal Costs, Internal Failure Costs, External Failure Costs, and Total Costs of Quality” and columns for “Percent of Sales in 2008” and “Percent of Sales in 2007.” Fill in this section using the data you created in steps 2 and 3.
5. Create a bar chart to compare each of the categories and total costs of quality in 2008 and 2007 by highlighting the “Percent of Sales in 2008” and “Percent of Sales in 2007”
columns and clicking the chart wizard icon. Choose “Column” under chart type. Format as necessary and click on “Finish.”
6. Verify the accuracy ofyour spreadsheet: Change revenues in 2008 from $12,500 to $9,500.
If you programmed your spreadsheet correctly, total prevention costs as a percentage of revenues for 2008 should change to 5.3%.