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Managerial Accounting: The Corners...
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Managerial Accounting: The Corners...
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:
Required:
- 1. Compute the quality costs as a percentage of sales by category and in total for each year.
- 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. 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.
Calculate quality costs as a percentage of sales by category and in total.
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:
| Particulars | Amount ($) | Percentage of Sales (%) |
| Year 1 | Â | Â |
| Prevention | 10,000 | 1.00% |
| Appraisal | 20,000 | 2.00% |
| Internal Failure | 160,000 | 16.00% |
| External Failure | 120,000 | 12.00% |
| Total | 310,000 | 31.00% |
| Â | Â | Â |
| Year 2 | Â | Â |
| Prevention | 50,000 | 4.17% |
| Appraisal | 30,000 | 2.50% |
| Internal Failure | 120,000 | 10.00% |
| External Failure | 100,000 | 8.33% |
| Total | 300,000 | 25... |
2.
Prepare bar graph showing trend of the quality costs, category wise and in total.
3.
Compute savings in profit in case budgeted data is prepared as per year 1 costs.
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