QUESTION $1(20$ Marks$)$

$1\mathrm{.}1.$Study the information provided below and answer the following question.

INFORMATION

Mosaic Textiles $($Mosaic$)$ is an apparel manufacturer in a Southern African country $($the country is

anonymized as SACX hereafter$).$ Mosaic produces a range of high$-$end apparel which it sells to Truworld

Limited $($Truworld$),$ a well$-$known retailer also domiciled in SACX. The apparels are the only products

which Mosaic produces and Truworld is its only customer. Truworld has recently been affected by changes

in customer purchasing preferences to buying clothes online and, as a result, is keen to reduce its

inventory holding as a way of reducing its costs. Truworld has also found that it has an excess of goods

which it must discount as consumer tastes appear to change more quickly than in the past.

The chief executive officer $($CEO$)$ of Mosaic, Mrs$.$ Cynthia Ndwandwe, has given you some tasks to

undertake as the management accountant of Mosaic.

Current purchasing policy

Mosaic currently obtains its raw materials from four suppliers. Each of these suppliers operates differently

in terms of the processes which they adopt in trading with Mosaic. Mosaic has been agreeable to this, as

the quality of the raw material supplied has generally been acceptable. More recently, however, Mosaic

has found reasons to question the accuracy and quality of the raw material delivered from one supplier.

Additionally, another supplier now only despatches material to Mosaic in full$-$load quantities as it wishes to

optimize the use of its delivery vehicles.

Current production methods

The performance metric at Mosaic for production efficiency is the number of apparels produced per period.

Mosaic$$s method of production is to produce individual clothes in long production runs which has helped to

reduce setup costs and thus, maximize output. Staff working in the production department have their

bonuses based on this metric.

Mosaic has a practice of testing goods at the final stage of production and before they leave the factory.

Goods which have not been produced according to required standards have traditionally been rejected at

the end of the production process. Mosaic$$s production control manager has indicated to you that the

current production methods have been successful, as the company only has $6\%$ of all its goods returned

from Truworld for quality$-$related reasons.

Just$-$in$-$time $($JIT$)$

Truworld would like to move to just$-$in$-$time $($JIT$)$ system of purchasing its goods from Mosaic. As a result,

Mosaic is contemplating major changes to its working practices. Mosaic$$s CEO has asked you, as the

company$$s management accountant, to assess the changes which Mosaic will have to make in the areas

of purchasing and production to continue supplying goods to Truworld on a JIT basis.

Costs of Quality

Mrs$.$ Ndwandwe has also made available to you a cost of quality report which she believes addresses all

relevant costs of quality. This report is shown in Table $1,$ below. She would like you to discuss the potential

quality cost changes considering the proposed move to JIT. She has indicated that some of these costs

have never been measured before and have been given financial values to help you to put together your

report. In addition, she informed you that Essel$$s current revenue is R$90$ million.

Table $1$:

Table $1$:

R R $\%$ of revenue $($R$90$m$)$

Costs of Conformance:

Prevention costs:

Preventive maintenance $100000$

Total $1000000\mathrm{.}11\%$

Appraisal costs:

Quality control supervisor $710000$

Quality audits $100000$

Total $8100000\mathrm{.}90\%$

Costs of non$-$conformance:

Internal failure costs:

Rework cost $2540000$

Downtime due to quality problems $1760000$

Scrap $1350000$

Total $56500006\mathrm{.}28\%$

External failure costs:

Cost of complaints from Truworld $2900000$

Foregone contribution from lost sales$*1900000$

Product recalls and cost of goods

returned

$4100000$

Total $89000009\mathrm{.}89\%$

Grand total $1546000017\mathrm{.}18\%$

$*$ Foregone contribution from lost sales is an example of potential sales lost to Truworld due to problems

related to production and delivery experienced by Mosaic

Required:

Study the information provided above and write a brief report on changes related to the costs of quality in

response to the request of Mrs$.$ Cynthia Ndwandwe, Mosaic$$s CEO $($Note: Your report should highlight Mosaic$$s

cost of conformance and the cost of non$-$conformance. Please note that marks will be awarded for the

demonstration of skill in analysis and evaluation, scepticism, and commercial acumen in your answer$).$