C39MT1: Quality & Throughput (2006) Workshop Solution

Required:
The following quality report comparing the quality performances of 2004 and 2005 was
prepared by the assistant controller, Matt Dylan of Wiseman Products.
2005
80,000,000
600,000
1,250,000
1,000,000
1,350,000
900,000
3%

Sales
On-line inspection
Warranty Liability
Product testing
Scrap
Design engineering
Quality complaints (customers)

2004
70,000,000
500,000
2,600,000
500,000
1,000,000
400,000
4%

On discussing the results of the report, it became clear that the plant manager was dissatisfied
and upset with the recent costs of quality and non-financial measures of quality reports
presented. The plant manager argues that significant progress in improving quality within the
plant has been achieved and that this has not been reflected in the reports. The plant manager
had intended to apply for various quality awards that would be prestigious for the company
and would provide invaluable press coverage, but cannot do so on the basis of the results of
the reports. The head quality controller, Leo Sartori, instructs Matt Dylan to go over the
figures again and see what he can do. Dylan would also like the company to win an award but
is certain that his figures are correct. He is confused as to how to handle the request.
a) Calculate the ratio of prevention cost, appraisal costs, internal failure costs and external
failure costs to sales in 2004 and 2005.
2005
Cost

Costs of Quality
Prevention costs
Design engineering

900,000

Appraisal costs
On-line inspection
Product testing
Total appraisal costs

2005
% of Sales

2004

2004
% of Sales

1.125%

400,000

0.571%

600,000
1,000,000
1,600,000

2.000%

500,000
500,000
1,000,000

1.429%

Internal failure costs

Scrap

1,350,000

1.688%

1,000,000

1.429%

External failure costs

Warranty liability

1,250,000

1.563%

2,600,000

3.714%

Total quality costs

5,100,000

6.375%

5,000,000

7.143%

b)

What the reports indicate about the plants quality performance.

Dylan has made the correct shift in quality management by investing more in prevention and
appraisal while reducing external failure costs. However, it still needs to reduce costs in all
costs of quality categories by becoming more efficient in its prevention and appraisal
activities and more effective in implementing these programs to reduce failure costs.
c)

Discuss the ethical dimensions of recalculating and modifying the figures. What
steps should Dylan take to resolve this conflict?

Incorrect reporting of the costs of quality and various non-financial measures of quality with
the goal of winning various quality awards is unethical. In assessing the situation, some
elements of Ethical Guidelines that the management accountant could consider are listed
below.
Competence

Clear reports using relevant and reliable information should be prepared. Preparing reports on
the basis of incorrect costs of quality numbers in order to make the company's quality
performance look better than it is violates competence standards. It is unethical for Sarori to
suggest that Dylan change the costs of quality and non-financial measures of quality numbers
in order to make the plant's performance look good.
Integrity

The management accountant has a responsibility to avoid actual or apparent conflicts of

interest and advise all appropriate parties of any potential conflict. Saroris motivation for
wanting Dylan to revise the quality figures could well have been motivated by Saroris desire
to please the plant manager. This action could be viewed as violating the responsibility for
integrity. The Standards of Ethical Conduct require the management accountant to
communicate unfavourable as well as favourable information. In this regard both Saroris and
Dylan behaviour (if Dylan agrees to modify the costs of quality numbers) could be viewed as
unethical.
Objectivity

The management accountant's standards of ethical conduct require that information should be
fairly and objectively communicated and that all relevant information should be disclosed.
From a management accountant's standpoint, adjusting the quality numbers to make quality
performance look good would violate the standard of objectivity. For the various reasons
cited above, we should take the position that Saroris and Dylan behaviour (if Dylan goes
along with Saroris wishes) is unethical. Dylan should indicate to Sarori that the costs of
quality and non-financial measures of quality presented in the reports are indeed appropriate.
If Sarori still insists on modifying the quality numbers and reporting better quality figures,
Dylan should raise the matter with one of Saroris superiors, other than the plant manager,
who happens to have a vested interest in this dispute. If, after taking all these steps, there is
continued pressure to overstate quality performance, Dylan should consider resigning from
the company, and not engage in unethical behaviour.