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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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In 20X2, Clarkson Inc. initiated a full-scale, quality improvement program. At the end of the year, Tony Ming, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees. Of most interest to the president, however, was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 20X1 and 20X2 are as follows by quality category:

Chapter 13, Problem 55P, In 20X2, Clarkson Inc. initiated a full-scale, quality improvement program. At the end of the year,

All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variable.

Required:

  1. 1. Compute the relative distribution of quality costs for each year and prepare a pie chart. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain.
  2. 2. Prepare a 1-year trend performance report for 20X2 (comparing the actual costs of 20X2 with those of 20X1, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Clarkson Inc.?
  3. 3. Estimate the additional improvement in profits if Clarkson Inc. ultimately reduces its quality costs to 3% of sales revenues (assume sales of $15 million).

1.

To determine

Prepare quality cost report and pie chart.

Explanation

Quality Cost:

Organizations are required to bear costs due to non-conformity of goods or services with the general specifications. These costs are termed as quality costs. Quality costs can be categorized into preventive costs, detective costs, internal failure costs and external failure costs.

Preparation of quality cost report:

ParticularsYear 1 ($)Year 2 ($)
Prevention costs:  
Quality circles6,00060,000
Design reviews3,00030,000
Quality improvement projects3,000150,000
Total prevention costs (A)12,000240,000
Percentage (E)0.39%7.81%
Detection costs:  
Packaging inspection480,000450,000
Product acceptance60,00042,000
Total detection costs (B)540,000492,000
Percentage (F)17.58%16.02%
Internal failure costs:  
Scrap420,000360,000
Rework540,000480,000
Yield losses240,000150,000
Retesting300,000240,000
Total internal failure costs (C)1,500,0001,230,000
Percentage (G)48.83%40...

2.

To determine

Present a performance report for year 2 by comparing budgeted and actual figures of year 2. Also, compute the profits that have been increased due to quality improvements.

3.

To determine

Compute increase in profits in case quality costs are reduced to 3% of sales revenue.

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