LL designs and makes a single product, the X4, used in the telecommunications industry. The organisation has a goods received store which employs staff who carry out random checks to ensure materials are of the correct specification. In addition to the random checks, a standard allowance is made for failures due to faulty materials at the completion stage and the normal practice is to charge the cost of any remedial work required to the cost of production for the month. Once delivered to the customer, any faults discovered in the X4 during its warranty period become an expense of the customer support department.
At the end of each month, management reports are prepared for the Board of Directors. These identify the cost of running the stores and the number of issues, the cost of production and the number of units manufactured, and the cost of customer support.
Required
(a) Briefly discuss why the current accounting system fails to highlight the cost of quality.
(b) Identify four general categories (or classifications) of LL's activities where expenditure making up the explicit cost of quality will be found and provide an example of a cost found within each category.
(c) Give one example of a cost of quality not normally identified by the accounting system.