Quality costs by category are expressed as a percentage of sales as follows: Prevention Appraisal Internal Failure External Failure 20x1 1.0% 3.0% 7.0% 9.0% 20x2 2.0 4.0 6.0 6.0 20x3 2.5 4.0 5.0 5.0 20x4 3.0 3.5 4.5 3.0 20x5 3.5 3.5 2.0 2.0 The detail of the 20x5 budget for quality costs is also provided. Prevention costs: S 150,000 Quality planning Quality training Quality improvement (special project) Quality reporting Appraisal costs: Proofreading Other inspection Failure costs: 20,000 80,000 10,000 500,000 50,000 Correction of typos Rework (because of customer complaints) Plate revisions 150,000 75,000 55,000 Press downtime 100,000 Waste (because of poor work) Total quality costs 130,000 S1,320,000 All prevention costs are fixed; all other quality costs are variable. During 20x5, the company had S12 million in sales. Actual quality costs for 20x4 and 20x5 are as follows: 20x5 20x4 Quality planning Quality training Quality improvement Quality reporting Proofreading Other inspection Correction of typos s150,000 20,000 S140,000 20,000 100,000 120,000 12,000 520,000 12,000 580,000 60,000 165,000 80,000 200,000 Rework 76,000 131,000 Plate revisions 58,000 102,000 83,000 123,000 Press downtime Waste 136,000 191,000
Iona Company, a large printing company, is in its fourth year of a five-year, quality improvement program. The program began in 20x0 with an internal study that revealed the quality costs being incurred. In that year, a five-year plan was developed to lower quality costs to 10 percent of sales by the end of 20x5. Sales and quality costs for each year are as follows:
Sales Revenues Quality Costs
20x1 $10,000,000 $2,000,000
20x2 10,000,000 1,800,000
20x3 11,000,000 1,815,000
20x4 12,000,000 1,680,000
20x5* 12,000,000 1,320,000
Required:
1. Prepare an interim quality cost performance report for 20x5 that compares actual quality costs with budgeted quality costs. Comment on the firm’s ability to achieve its quality goals
for the year.
2. Prepare a one-period quality performance report for 20x5 that compares the actual quality costs of 20x4 with the actual costs of 20x5. How much did profits change because of
improved quality?
3. Prepare a graph that shows the trend in total quality costs as a percentage of sales since the inception of the quality improvement program.
4. Prepare a graph that shows the trend for all four quality cost categories for 20x1 through 20x5. How does this graph help management know that the reduction in total quality costs
is attributable to quality improvements?
5. Assume that the company is preparing a second five-year plan to reduce quality costs to 2.5 percent of sales. Prepare a long-range quality cost performance report assuming sales of
$15 million at the end of five years. Assume that the final planned relative distribution of quality costs is as follows: proofreading, 50 percent; other inspection, 13 percent; quality
training, 30 percent; and quality reporting, 7 percent.
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