Using ABC in conjunction with quality decisions (Learning Objectives 2, 5)

Real Toys is using a costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The company’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the toy robot follow. Also shown is the cost allocation rate for each activity.

Requirements 1. Calculate the predicted quality cost savings from the design engineering work.
2. Real Toys spent $60,000 on design engineering for the new toy robot. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Real Toys’ managers have had in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

Predicted Reduction in Activity Units 300 Activity Cost Allocation Rate per Unit $20 30 Activity Inspection of incoming materials............ Inspection of finished goods.................. 300 Number of defective units discovered in-house.......... 3,200 15 Number of defective units discovered by customers...... 900 35 Lost sales to dissatisfied customers....... 300 55