Direct Labor and Direct Materials;

¶ … direct labor and direct materials; Taguchi cost function and quality cost analysis

Cost variance refers to the real cost of a particular project, as expressed by the difference between the earned value and the actual cost. A favorable cost variance will be more than zero while an unfavorable variance will be less than zero (CV, 2010, PM). One key component of the cost of a project is its direct labor costs, or the cost of the labor involved in actually producing the item in question. This is distinguished from indirect labor costs, such as the costs generated by the individuals who maintain or support the production process. While the direct materials used in the production process must be obtained before being used, direct labor is obtained and used at the same time. The direct labor rate variance, the direct labor efficiency variance, and the standard direct labor cost are all calculated at the same time, from an accounting standpoint (Standard costing, 2010, Accounting coach). Direct materials are the materials used directly in the manufacturing process, such as the butter, sugar, and eggs used to make a cupcake, for example. Indirect materials are materials that are essential to the manufacturing process, such as the gloves used by workers to handle the final product in a sanitary fashion, but are not part of the actual, final product.

Distinguishing between direct and indirect costs is essential, given that some costs, such as the cost of the workers needed on the production line, are likely to go up or down with consumer demand in a different fashion than indirect costs. The number of workers required at the factory will increase during the company's busy season, while the number of workers needed to maintain the equipment may remain relatively constant. From a quality control analysis standpoint, the aspects of production most in need of reform should be distinguished and audited in terms of direct and indirect costs: if there is a sharp increase in the indirect costs of labor due to the need to maintain old or inferior equipment, replacing the equipment may be cheaper in the long run for the organization.

Quality cost analysis attempts to compute the costs of preventing, finding, and correcting defective work. The aim is to reduce these largely unnecessary costs of production. Costs of activities designed to prevent poor quality, such as the prevention and appraisal of quality, as well as the internal and external costs of defects are considered to be quality-based costs of production (Kaner 1996) Traditional quality cost analysis held that a product was deemed of being of acceptable quality if measured within a specific 'range.' This is reflective of the general assumption in theoretical statistics that there will always be some deviation from the standard in batches of large numbers. However, according to the Taguchi method of quality control, any type of variation of quality outside of the target specification is troublesome and must be addressed. On the production line, a small defect could be potentially dangerous or render the product useless for either the producer or the manufacturer. Taguchi also expanded the focus of quality cost analysis and shifted his emphasis to improving production methods and service. As well as quality control in production, quality control was necessary in product planning and design, process design, and production services after purchase. Taguchi's quality loss function was designed to measure the success or failure of quality control in an absolute fashion, over the entire lifecycle of the item (Taguchi, 2010, Business Dictionary).

Question 2: What factors contribute to a manager's decision to recall a manufactured product? Support your answers with specific examples. How can managers within a service organization improve sales and control costs when utilizing the Taguchi quality control method? Give examples.

First and foremost, the question of product safety must be on the minds of managers when making the decision to recall a manufactured product: a product that has a defect in its design (such as an SUV that may easily 'roll over' and harm a passenger) or is contaminated (such as a batch of peanut butter containing salmonella) are examples of potentially dangerous products. There are other, more gray areas, however: an example might be a stroller that could, if improperly used, injure a child or a snack cake that may contain nuts (but is not labeled as such) and could be dangerous to people with nut allergies. In these instances, the company may instead release a warning rather than a full recall. Warnings may also be used if a product is harmless, but for some reason deviates from the company's usual quality specifications, such as a batch of candies with slightly off-color hues, or lower-than-advertised sale weights.