Case: Managing quality at Langers Ltd
Langers Ltd is a major Australian bicycle manufacturer. Over the last decade, bicycle manufacturers from Taiwan and Korea have been able to price their bikes below those of the Langers products, but the company has retained its market share due to the poor quality of the imported bikes. Recently, however, the quality of the imported bikes has improved, and Langers has had to cut prices to maintain market share. The managing director, Joe Langers, is concerned about the viability of the business at these lower prices and asks the head of the accounting team, Mary Martin, to investigate the problem.
Martin's initial investigation indicates that the lower prices cannot be sustained in the longer term, as they do not cover the costs of manufacture, let alone contribute to the company's selling and administrative costs. She looks for possible cost reductions. The company has always had a reputation for high quality, but Martin feels that there are substantial costs incurred in attaining this level of quality. She knows that there are extensive quality inspection checks throughout the production process and that many employees spend part of their time reworking defective parts.
She has also noticed the buckets full of scrapped parts and components spread throughout the factory. These costs are not recorded separately in the existing accounting system. Martin asks Langers to support the development of a cost of quality system.
Langers: What do you mean? A system that records the costs of poor quality?! Our bikes are among the best in terms of quality!
Martin: I know that, Joe, and we know what it costs us to make our bikes, but we've got no idea how much of that cost is related to ensuring quality. I think the cost of quality here is very high. What if it's a third of our manufacturing costs? And what if we could reduce it without compromising our quality? We could keep our prices down and still make a good profit.
Langers: Okay, Mary. Give your cost of quality system a try, though I don't see how it will help. Everybody knows that good quality costs money. Even if we do find out our cost of quality, I don't see how it will help us reduce it.
Martin: Joe, good quality doesn't seem to cost money in Taiwan and Korea. Their prices haven't gone up, even though their quality has. You'll soon see that understanding quality costs can help you to reduce them and to improve quality at the same time.
Over the next six months Martin identifies the following costs, which she thinks may to be related to of quality (she's not sure though):
- Bike showroom running expenses, $33,000.
- Contribution margin forgone on bikes returned by customers, $4,500.
- Contribution margin forgone on lost future bike sales, $15,000.
- Cost of bikes returned by customers and scrapped, $13,000.
- Cost of faulty bikes that are scrapped after finished goods inspection, $22,000.
- Cost of faulty components that are scrapped, $9,000.
- Cost of quality training programs, $8,000.
- Cost of repairs under warranty, $7,500.
- Cost of replacement bikes provided under warranty, $18,000.
- Cost of re-welding faulty joints discovered during processing, $43,000.
- Engineering costs to correct production line quality problems, $34,000.
- General engineering costs, $78,000.
- Inspection of bikes put into finished goods warehouse, $36,000.
- Laboratory testing of bikes and components, $30,000.
- Lost contribution on machine downtime during correction of production line quality problems, $45,000.
- Operating an X-ray machine to detect faulty welds, $33,000.
- Quality inspection in the goods receiving area, $31,000.
- Quality inspections during processing, $37,000.
- Rework on defective wheels, $17,000.
- Sales commissions on faulty bikes returned by customers, $4,000.
- Sales commissions paid to sacked employees, $21,000.
During this period, total manufacturing costs were $1,900,000.
Requirements:
1. Prepare a cost of quality report that provides information for management in an informative way. This report should include your analysis as well as your evaluation of the current situation.
2. Drawing on your analysis above, but not limited by it, make a set of appropriately justified recommendations to management regarding ways in which the company could improve the management of quality.
3. Discuss how accounting and performance measurement systems may create challenges to quality management. What recommendations would you make to their design to enable effective quality management?
Acknowledgement: Case adapted from Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R. W.(2015). Management accounting: Information for creating and managing value (7th ed.). Sydney, NSW: McGraw Hill. ISBN: 9781743075906
Attachment:- Assignment.rar