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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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Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its fourth year of a 5-year, quality improvement program. The program began in 20X1 as a result of a report by a consulting firm that revealed that quality costs were about 20% of sales. Concerned about the level of quality costs, Luna’s top management began a 5-year plan in 20X1 with the objective of lowering quality costs to 10% of sales by the end of 20X5. Sales and quality costs for each year are as follows:

Chapter 13, Problem 63C, Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its , example  1

Quality costs by category are expressed as a percentage of sales as follows:

Chapter 13, Problem 63C, Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its , example  2

The detail of the 20X5 budget for quality costs is also provided.

Chapter 13, Problem 63C, Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its , example  3

Actual quality costs for 20X4 and 20X5 are as follows:

Chapter 13, Problem 63C, Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its , example  4

Required:

  1. 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. 2. Prepare a single-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. 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. 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. 5. Assume that the company is preparing a second 5-year plan to reduce quality costs to 2.5% of sales. Prepare a long-range quality cost performance report that compares the costs for 20X5 with those planned for the end of the second 5-year period. Assume sales of $45 million at the end of 5 years. The final planned relative distribution of quality costs is as follows: proofreading, 50%; other inspection, 13%; quality training, 30%; and quality reporting, 7%. Assume that all prevention costs are fixed and all other costs are variable (with respect to sales).

1.

To determine

Present interim quality cost performance report.

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.

Quality cost performance report:

Particulars

Budgeted

($)

Actual

($)

Variance

($)

Prevention   
Quality planning450,000450,0000
Quality training180,000160,00020,000
Special project430,000390,00040,000
Quality reporting260,000260,0000
Total prevention costs(A)1,320,0001,260,00060,000
Appraisal   
Proofreading860,000800,00060,000
Other inspection480,000460,00020,000
Total appraisal costs (B)1,340,0001,260,00080,000
Internal Failure   
Correction of typos375,000350,00025,000
Plate revisions125,000100,00025,000
Press downtime221,000200,0...

2.

To determine

Compare actual costs of the year 20X4 with the costs of 20X5

3.

To determine

Prepare trend graph for total quality costs.

4.

To determine

Prepare trend graph for the category wise quality costs.

5.

To determine

Prepare performance report by comparing actual costs of year 20X5 with costs planned in the next five years.

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