Quality Cost Report, Taguchi Loss Function

Kathy Shorts, president of Oliver Company, was concerned with the trend in sales and profitability. The company had been losing customers at an alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the end of $20$x$5,$ Kathy decided to begin a quality improvement program. As a first step, she identified the following costs in the accounting records as quality related:

$20$x$5$

Sales $(600,000$ units @ $$100)$ $$60,000,000$

Retesting $1,800,000$

Rework $2,400,000$

Vendor certification $720,000$

Consumer complaints $1,200,000$

Warranty $2,400,000$

Test labor $1,800,000$

Inspection labor $1,500,000$

Design reviews $180,000$

$1.$ Prepare a quality cost report by quality cost category. Round percentages to one decimal place if rounding is required. For example, $5\mathrm{.}789\%$ would be entered as $"5\mathrm{.}8".$

$2.$ Calculate the relative distribution percentages for each quality cost category. Round percentages to one decimal place if rounding is required. For example, $5\mathrm{.}789\%$ would be entered as $"5\mathrm{.}8".$

Using the Taguchi loss function, an average loss per unit is computed to be $$15$ per unit. What are the hidden costs of external failure? Prepare a quality cost report by quality cost category. Round percentages to one decimal place if rounding is required. For example, $5\mathrm{.}789\%$ would

be entered as $"5\mathrm{.}8".$

Oliver Company

Quality Cost Report

For the Year Ended December $31,20$x$5$ Calculate the relative distribution percentages for each quality cost category. Round percentages to one decimal place if rounding is required. For

example, $5\mathrm{.}789\%$ would be entered as $"5\mathrm{.}8".$

Comment on the distribution.

More resources need to be invested in control activities with the objective of driving down failure costs. $$

Using the Taguchi loss function, an average loss per unit is computed to be $$15$ per unit. What are the hidden costs of external failure?

$

How does this affect the relative distribution?

A serious imbalance between control and failure costs has now been revealed, and failure costs should be decreased. $$

Shorts's quality manager decided not to bother with the hidden costs since any efforts to reduce measured external failure costs will also reduce

the hidden costs. Do you agree or disagree?

Agree, though ignoring the hidden costs may result in underestimating the need to reduce failure costs. $$ Quality Cost Report, Taguchi Loss Function

Kathy Shorts, president of Oliver Company, was concerned with the trend in sales and profitability. The company had been losing customers at an

alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the

end of $205,$ Kathy decided to begin a quality improvement program. As a first step, she identified the following costs in the accounting records as

quality related:

Required:

Prepare a quality cost report by quality cost category. Round percentages to one decimal place if rounding is required. For example, $5\mathrm{.}789\%$ would

be entered as $"5\mathrm{.}8".$