The three types of costs include failure costs, appraisal costs, and prevention costs (Schiffauerova and Thomson, 2006).
Failure costs include the costs of any deficiencies discovered prior to and after product delivery (Schiffauerova and Thomson, 2006). For example, many products fail to conform to customer requirements due incomplete wrapping. This is a type of failure cost that occurs prior to product delivery and that acts as a big threat to quality. In most instances, customers reject products due to breakages that occur during transit. This is an example of failure cost that occurs after delivery and that is also a big quality-related issue. Many products are incompletely wrapped due to an improperly functioning wrapping machine. The wrapping machine cost the company close to 2 million dollars and I do not think it is necessary to replace the machine any soon. In every year, the total quality cost incurred by the company due to incompletely wrapped products is 500,000 United States dollars. Again, many breakages occur during transit due to reckless driving. The total quality cost due to broken and rejected products every year is 150,000 United States dollars. This includes 50,000 dollars used in training drivers and 100,000 dollars spent on fuel.
Appraisal costs are costs that the company incurs as it struggles to ensure that all products conform to quality requirements (Schiffauerova and Thomson, 2006). As a way of ensuring conformance with quality requirement, the company must conduct third party audits and put in place a good data collecting system. Within a period of one year, the company will have to spend 80,000 United States dollars on appraisals. Third party auditing will require the company to hire an auditing firm to assess the company’s operations in order to determine whether they conform to quality requirements. The cost of hiring an auditing firm to appraise the company’s operations for one year will cost 50,000 United Stated dollars. Development of a good data collecting system will cost the company a total of 30,000 United States dollars. This includes the cost of hiring a professional data analyst on an annual basis.
Prevention costs are the costs that the company incurs in order to keep appraisal costs at minimum levels (Schiffauerova and Thomson, 2006). For example, the company must be prepared to spend some money on mistake proofing as a move towards elimination of any factors that may prevent a product from conforming to quality requirements. The company will have to incur 300,000 United States dollars on mistake proofing on a yearly basis. The cost includes that of hiring a quality assurance officer who will test products to ensure that there are no mistakes.
The trade-offs associated with the failure costs, appraisal costs, and prevention costs require the efforts of everyone in the company, including managers, supervisors, and employees (Schiffauerova and Thomson, 2006). The two major problems in the company that lead to high failure costs are wrapping machine failure and inadequately trained drivers. These costs can be minimized if the wrapping machine is subjected to routine maintenance and when the company embarks on extensive driver training. In addition, the company’s supervisors must conduct inspections on a regular basis to ensure that the wrapping machine is properly operated and the delivery vehicle is properly driven (Jeffery, 2004).
Currently, the company incurs high appraisal costs due to lack of a third party audit and a good data collecting system. It is therefore important for the company to hire an auditing firm and develop a good data collecting system with an immediate effect. Effective implementation of these two factors will help the company to minimize appraisal costs. Finally, the company should employ and competent quality assurance officer in order to minimize prevention costs (Jeffery, 2004).
This company can better minimize quality-related costs if it begins to have established expense accounts. In order to have established expense accounts, the company needs to inspect all appraisal activities across all departments. In addition, it needs to assess all expenses that it incurs on customer response warranty issues (Jeffery, 2004). Another way through which this company can minimize quality-related costs is by improving its accounting documents. For instance, employees from the production department may conduct product inspection to ensure that the products conform to quality requirements. The company can secure the names of these employees in order to quantify the costs of quality incurred, maybe on a monthly basis. Ideally, this company can avoid quality-related costs if it assigns clear responsibility for action and a structured approach to minimize them (Jeffery, 2004).