Reference no: EM131800669

The Federated Screw Company manufactures a wide variety of made-to-order screws for industrial companies. The designs are usually supplied by customers. Total manufacturing payroll is 260 people with sales of about $28 million. Operations are relatively simple but geared to high-volume production. Wire in rolls is fed at high speeds to heading machines, where the contour of the screw is formed. Pointers and slotters perform secondary operations. The thread-rolling operation completes the screw configuration. Heat treatment, plating, and sometimes baking are the final steps and are performed by an outside contractor located nearby.

You have been asked to prepare a quality cost summary for the company and have made the following notes:

• The quality control department is primarily a final inspection department (eight inspectors), which also inspects the incoming wire. Patrol inspection (one inspector) is performed in the Heading Room by checking the first and last pieces of each run. The quality control department also checks and sets all gages used by that department and by production personnel. An inspector's salary is approximately $24,000 a year.
• Quality during manufacture is the responsibility of the operator setup teams assigned to batteries of about four machines each. It is difficult to estimate how much of their time is spent checking setups or checking the running of the machines, so you have not tried to do this as yet. Production has two sorting inspectors, each earning $18,000, who sort lots rejected by final inspection.
• The engineering department prepares quotations, designs tools, plans the routing of jobs, and establishes quality requirements, working from customers' prints. The engineers also do troubleshooting, at a cost of about $20,000 a year. Another $16,000 is spent in previewing customers' prints to identify critical dimensions, trying to get such items changed by the customer, and interpreting customers' quality requirements into specifications for use by Federated inspectors and manufacturing personnel.
• Records of scrap, rework, and customer returns are meager, but you have been able to piece together a certain amount of information from records and estimates:

Scrap from final inspection rejections and customer returns amounted to 438,000 and 667,000 pieces, respectively, for the last two months.

Customer returns requiring rework average about 1 million pieces per month.

Scrap generated during production is believed to be about half of the total floor scrap (the rest is not quality related) of 30,000 pounds per month.

Final inspection rejects an average of 400,000 reworkable pieces per month. These items can then be flat rolled or rerolled.

• Rough cost figures have been obtained from the accountants, who say that scrap items can be figured at $12.00 per thousand pieces, floor scrap at $800 per thousand pounds, reworking of customer returns at $4.00 per thousand pieces, and flat rolling or rerolling at $1.20 per thousand pieces. These figures are supposed to include factory overhead.

Prepare a quality cost summary on an annual basis. (This example was adapted from one originally prepared by L. A. Seder.)