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Assume you are the management accountant for the Foleo Group. James and Leon have called you and the CFO into a meeting to discuss concerns they have with the number of SliFones that are being returned by customers under warranty. They have pulled some numbers from the accounting system and elsewhere regarding not only the warranty costs, but also other expenses associated with the quality of the phones for the 2016 year. The directors have handed you the below costs and asked you to look into why faulty SliFones are being returned by customers even though Foleo Fones is spending so much on the quality of their product.

Quality Activity	Cost of Quality Activity	P/A/I/E
Inspection of components purchased from suppliers	$17,000
Testing phones during production processes	$25,000
Cost of reworking faulty phones	$24,500
Quality Assurance testing before delivery of phones	$11,700
Cost of repairing & replacing faulty phones returned under warranty	$78,300
Cost of servicing customers quality complaints	$66,900
Cost of scrapped phones during production	$11,300
Service callout costs to customer sites to fix phones	$37,600
Quality training for production staff	$5,000
Legal fees defending safety claims against the SliFone batteries	$250,000
Cost of recalling SliFones with faulty batteries	$174,500
Lost contribution margin on future sales due to quality issues	$95,000
Production downtime due to suppliers poor quality components	$67,500
Depreciation on testing equipment	$23,000
Maintenance on production equipment	$1,300
Freight costs to & from customers for phone repairs	$3,500
TOTAL QUALITY COSTS	$892,100

1. Classify each of the quality costs as Prevention (P), Appraisal (A), Internal (I) or External (E) Failure costs. (0.5 mark)

(HINT: there are 3, 3, 3, and 7 Prevention, Appraisal, Internal Failure, and External Failure cost items, respectively)

Answer Part (a) in the appropriate column above.

(b) Prepare a Cost of Quality Report, including the percentage of total cost for each category. (2 marks)

3. Prepare a written report for the Directors that explains and analyses the Cost of Quality Report you have just prepared. In your report to James and Leon, you must also include a recommendation on how to improve the overall quality of the SliFone.

(HINT: ensure you discuss the relative proportions of the four (4) categories and the likely impact of changes on each of the groups of costs) (1.5 marks)

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