Chapter 14, Problem 2CE

1.

To determine

Calculate the budgeted costs for 2015 and prepare an interim quality performance report.

Explanation of Solution

Interim quality performance report: Interim quality performance report compares the actual quality at the end of the period with the budgeted costs and this report examines the progress attained within the period comparative to the planned level of progress for that period.

Calculate the budgeted costs for 2015 and prepare an interim quality performance report:

Incorporation D
Interim Standard Performance Report: Quality Costs For the Year Ended
For the Year Ended December 31,2015
Particulars	Actual costs (a)	Budgeted costs (b)	Variance $\left(\text{b}-\text{a}\right)$
Prevention costs:
Quality audits	$90,000	$ 90,000(2)	$0
Vendor certification	$180,000	$180,000(3)	$0
Total prevention costs	$270,000	$270,000	$0
Appraisal costs:
Product acceptance	$135,000	$ 135,000(4)	$0
Process acceptance	$109,500	$112,500(5)	(3,000)	F
Total appraisal costs	$244,500	$247,500	($3,000)	F
Internal failure costs:
Retesting	$90,000	$ 81,600(7)	($8,400)	U
Rework	$180,000	$172,800(8)	($7,200)	U
Total internal failure costs	$270,000	$254,400	$15,600	U
External failure costs:
Recalls	$120,000	$ 120,000(9)	$0
Warranty	$300,000	$ 264,000(10)	($36,000)	U
Total external failure costs	$420,000	$384,000	($36,000)	U
Total quality costs	$1,204,500	$1,155,900	$48,600	U
Percentage of sales	10.04%(11)	9.63%(12)	0.41%(13)	U

Table (1)

Note: F denotes “Favorable” and U denotes “Unfavorable”.

Working notes:

(1)Calculate the increase in investment:

$\begin{array}{c}\begin{array}{l}\text{Increase}\\ \text{in}\text{investment}\end{array}\}\text{=}\frac{\text{Increase}\text{in}\text{percentage+}\text{100\%}}{\text{100\%}}\\ \text{=}\frac{\text{50}\text{\%+100\%}}{\text{100}\text{\%}}\\ \text{=}\frac{\text{150\%}}{\text{100\%}}\\ \text{=}\text{1}\text{.5}\end{array}$

(2)Calculate the budgeted cost of quality audits:

$\begin{array}{c}\begin{array}{l}\text{Calculate}\text{the}\text{Budgeted}\\ \text{cost}\text{of}\text{quality}\text{audits}\end{array}\}\text{=}\left(\begin{array}{l}\text{Prevention}\text{costs}\text{of}\text{quality}\text{costs}\text{during}\text{2014}\text{×}\\ \text{Increase}\text{in}\text{investment}\end{array}\right)\\ \text{=}\text{\$60,000}\text{×}\text{1}\text{.5}\text{(1)}\\ \text{=}\text{\$90,000}\end{array}$

(3)Calculate the budgeted cost of vendor certification:

$\begin{array}{c}\begin{array}{l}\text{Budgeted cost of }\\ \text{vendor certification}\end{array}\}\text{=}\left(\begin{array}{l}\text{Prevention}\text{cost}\text{of}\text{vendor}\text{certification}\text{during}\text{2014×}\\ \text{Percentage}\text{of}\text{increase}\text{in}\text{investment}\end{array}\right)\\ \text{=}\text{\$120,000}\text{×}\text{1}\text{.5}\text{(1)}\\ \text{=}\text{\$180,000}\end{array}$

(4)Calculate the budgeted cost of product acceptance:

$\begin{array}{c}\begin{array}{l}\text{Budgeted cost of }\\ \text{Product}\text{acceptance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Appraisal}\text{cost}\text{of}\text{product}\text{acceptance}\text{during}\text{2014}\text{×}\\ \text{Percentage}\text{of}\text{increase}\text{in}\text{investment}\end{array}\right)\\ \text{=}\text{\$90,000}\text{×}\text{1}\text{.5}\text{(1)}\\ \text{=}\text{\$135,000}\end{array}$

(5)Calculate the budgeted cost of process acceptance:

$\begin{array}{c}\begin{array}{l}\text{Budgeted cost of }\\ \text{Product}\text{acceptance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Appraisal}\text{cost}\text{of}\text{process}\text{acceptance}\text{during}\text{2014}\text{×}\\ \text{Percentage}\text{of}\text{increase}\text{in}\text{investment}\end{array}\right)\\ \text{=}\text{\$75,000}\text{×}\text{1}\text{.5}\text{(1)}\\ \text{=}\text{\$112,500}\end{array}$

(6)Calculate the decrease in failure costs:

$\begin{array}{c}\text{Decrease}\text{in}\text{failure}\text{cost}\}\text{=}\frac{\text{100\%}-\text{Decrease}\text{in}\text{percentage}}{\text{100\%}}\\ \text{=}\frac{\text{100\%}-\text{20\%}}{\text{100}\text{\%}}\\ \text{=}\frac{\text{80\%}}{\text{100\%}}\\ \text{=}\text{0}\text{.8}\end{array}$

(7)Calculate the budgeted cost of retesting:

$\begin{array}{c}\text{Budgeted}\text{cost}\text{of}\text{retesting}\text{=}\left(\begin{array}{l}\text{Internal}\text{failure}\text{costs}\text{of}\text{retesting}\text{during}\text{2014×}\\ \text{Rate}\text{of}\text{decrease}\text{in}\text{failure}\text{cost}\end{array}\right)\\ \text{=}\text{\$102,000}\text{×}\text{0}\text{.8}\text{(6)}\\ \text{=}\text{\$81,600}\end{array}$

(8)Calculate budgeted cost of rework:

$\begin{array}{c}\text{Budgeted}\text{cost}\text{of}\text{rework}\text{=}\left(\begin{array}{l}\text{Internal}\text{failure}\text{costs}\text{of}\text{rework}\text{during}\text{2014}\text{×}\\ \text{Decrease}\text{in}\text{failure}\text{cost}\end{array}\right)\\ \text{=}\text{\$216,000}\text{×}\text{0}\text{.8}\text{(6)}\\ \text{=\$}\text{172,800}\end{array}$

(9)Calculate budgeted cost of recalls:

$\begin{array}{c}\text{Budgeted}\text{cost}\text{of}\text{recalls}\text{=}\left(\begin{array}{l}\text{External}\text{failure}\text{cost}\text{of}\text{recalls}\text{during}\text{2014}\\ \text{×}\text{Decrease}\text{in}\text{failure}\text{costs}\end{array}\right)\\ \text{=}\text{\$150,000}\text{×}\text{0}\text{.8}\text{(6)}\\ \text{=\$120,000}\end{array}$

(10)Calculate the budgeted cost of warranty:

$\begin{array}{c}\text{Budgeted}\text{cost}\text{of}\text{warranty}\text{=}\left(\begin{array}{l}\text{External}\text{failure}\text{cost}\text{of}\text{warranty}\text{during}\text{2014}\\ \text{×}\text{Decrease}\text{in}\text{failure}\text{costs}\end{array}\right)\\ \text{=}\text{\$330,000}\text{×}\text{0}\text{.8}\text{(6)}\\ \text{=\$264,000}\end{array}$

(11)Calculate the total percentage of actual costs:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{percentage}\\ \text{of}\text{actual}\text{costs}\end{array}\}\text{=}\frac{\text{Total}\text{actual}\text{costs}}{\text{Total}\text{sales}}\text{×}\text{100\%}\\ \text{=}\frac{\text{\$1,204,500}}{\text{\$12,000,000}}\text{×}\text{100\%}\\ \text{=}\text{10}\text{.4\%}\end{array}$

(12)Calculate the total percentage of budgeted costs:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{percentage}\\ \text{of}\text{budgeted}\text{costs}\end{array}\}\text{=}\frac{\text{Total}\text{budgeted}\text{costs}}{\text{Total}\text{sales}}\text{×}\text{100\%}\\ \text{=}\frac{\text{\$1,155,900}}{\text{\$12,000,000}}\text{×}\text{100\%}\\ \text{=}\text{9}\text{.63\%}\end{array}$

(13)Calculate the total percentage of variance:

$\begin{array}{c}\text{Total}\text{percentage}\text{of}\text{variance =}\frac{\text{Total}\text{variance}}{\text{Total}\text{sales}}\text{×}\text{100\%}\\ \text{=}\frac{\text{\$48,600}}{\text{\$12,000,000}}\text{×}\text{100\%}\\ \text{=}\text{0}\text{.41\%}\end{array}$

2.

To determine

Comment on the significance of the report.

Explanation of Solution

Incorporation D is nearer to the planned outcomes as it is only 0.41 percent short. Therefore, the belief of management regarding investing of additional 50 % in control costs will produce a 20 % decrease in failure costs that appears to be validated.

3.

To determine

State the adjustment made to budgeted rework costs, budgeted quality audits if sales are $12,000,000 for 20x4 and $15,000,000 for 2015 and comment on the performance of Incorporation assuming that actual costs for 2015 did not change.

Explanation of Solution

• It is expected that, rework costs will vary with sales. Therefore, increase in sales by 25% will increase the budgeted rework cost by 25% $\left(\$270,000=\text{\$216,000}\text{×}\text{1}\text{.25}\right)$ which will create a “favorable rework variance” of $90,000$\left(\text{\$180,000}-\text{\$270,000}\right)$.
• All variable costs will have “increase in budgets”, and the “budgeted variance” will be more favorable than originally computed.
• Quality auditing is probably an “optional fixed cost” and there its budget will not be influenced by changes in sales variance.