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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 20X1, Don Blackburn, president of Price Electronics, received a report indicating that quality costs were 31% of sales. Faced with increasing pressures from imported goods. Don resolved to take measures to improve the overall quality of the company’s products. After hiring a consultant in 20X1, the company began an aggressive program of total quality control. At the end of 20X5, Don requested an analysis of the progress the company had made in reducing and controlling quality costs. The accounting department assembled the following data:

Chapter 13, Problem 56P, In 20X1, Don Blackburn, president of Price Electronics, received a report indicating that quality

Required:

  1. 1. Compute the quality costs as a percentage of sales by category and in total for each year.
  2. 2. Prepare a multiple-year trend graph for quality costs, both by total costs and by category. Using the graph, assess the progress made in reducing and controlling quality costs. Does the graph provide evidence that quality has improved? Explain.
  3. 3. Using the 20X1 quality cost relationships (assume all costs are variable), calculate the quality costs that would have prevailed in 20X4. By how much did profits increase in 20X4 because of the quality improvement program? Repeat for 20X5.

1.

To determine

Calculate quality costs as a percentage of sales by category and in total.

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.

Computation of cost as a percentage of sales:

ParticularsAmount ($)Percentage of Sales (%)
Year 1  
Prevention10,0001.00%
Appraisal20,0002.00%
Internal Failure160,00016.00%
External Failure120,00012.00%
Total310,00031.00%
   
Year 2  
Prevention50,0004.17%
Appraisal30,0002.50%
Internal Failure120,00010.00%
External Failure100,0008.33%
Total300,00025...

2.

To determine

Prepare bar graph showing trend of the quality costs, category wise and in total.

3.

To determine

Compute savings in profit in case budgeted data is prepared as per year 1 costs.

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