Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
Question
Chapter 14, Problem 2CE

1.

To determine

Calculate the budgeted costs for 20x5 and prepare an interim quality performance report.

1.

Expert Solution
Check Mark

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 20x5 and prepare an interim quality performance report:

Incorporation D
Interim Standard Performance Report: Quality Costs For the Year Ended
For the Year Ended December 31,20x5
Particulars

Actual costs

(a)

Budgeted costs

(b)

Variance

(ba)

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$15,600U
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$48,600U
Percentage of sales10.04%(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:

Increaseininvestment}=Increaseinpercentage+100%100%=50%+100%100%=150%100%=1.5

(2)Calculate the budgeted cost of quality audits:

CalculatetheBudgetedcostofqualityaudits}=(Preventioncostsofqualitycostsduring20x4×Increaseininvestment)=$60,000×1.5(1)=$90,000

(3)Calculate the budgeted cost of vendor certification:

Budgeted cost of vendor certification}=(Preventioncostofvendorcertificationduring20x4×Percentageofincreaseininvestment)=$120,000×1.5(1)=$180,000

(4)Calculate the budgeted cost of product acceptance:

Budgeted cost of Productacceptance}=(Appraisalcostofproductacceptanceduring20x4×Percentageofincreaseininvestment)=$90,000×1.5(1)=$135,000

(5)Calculate the budgeted cost of process acceptance:

Budgeted cost of Productacceptance}=(Appraisalcostofprocessacceptanceduring20x4×Percentageofincreaseininvestment)=$75,000×1.5(1)=$112,500

(6)Calculate the decrease in failure costs:

Decreaseinfailurecost}=100%Decreaseinpercentage100%=100%20%100%=80%100%=0.8

(7)Calculate the budgeted cost of retesting:

Budgetedcostofretesting=(Internalfailurecostsofretestingduring20x4×Rateofdecreaseinfailurecost)=$102,000×0.8(6)=$81,600

(8)Calculate budgeted cost of rework:

Budgetedcostofrework=(Internalfailurecostsofreworkduring20x4×Decreaseinfailurecost)=$216,000×0.8(6)=$172,800

(9)Calculate budgeted cost of recalls:

Budgetedcostofrecalls=(Externalfailurecostofrecallsduring20x4×Decreaseinfailurecosts)=$150,000×0.8(6)=$120,000

(10)Calculate the budgeted cost of warranty:

Budgetedcostofwarranty=(Externalfailurecostofwarrantyduring20x4×Decreaseinfailurecosts)=$330,000×0.8(6)=$264,000

(11)Calculate the total percentage of actual costs:

Totalpercentageofactualcosts}=TotalactualcostsTotalsales×100%=$1,204,500$12,000,000×100%=10.4%

(12)Calculate the total percentage of budgeted costs:

Totalpercentageofbudgetedcosts}=TotalbudgetedcostsTotalsales×100%=$1,155,900$12,000,000×100%=9.63%

(13)Calculate the total percentage of variance:

Totalpercentageofvariance =TotalvarianceTotalsales×100%=$48,600$12,000,000×100%=0.41%

2.

To determine

Comment on the significance of the report.

2.

Expert Solution
Check Mark

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 20x5 and comment on the performance of Incorporation assuming that actual costs for 2015 did not change.

3.

Expert Solution
Check Mark

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% ($270,000=$216,000×1.25) which will create a favorable rework variance of $90,000($180,000$270,000).
  • All variable costs will have increase in budgets, and the budgeted variance will be more favorable than originally computed.
  • Quality auditing is probably a discretionary fixed cost and there its budget will not be influenced by changes in sales variance.

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Chapter 14 Solutions

Cornerstones of Cost Management (Cornerstones Series)

Ch. 14 - If a firms annual sales are 200 million, what...Ch. 14 - Explain why it is important for a manager to...Ch. 14 - Prob. 13DQCh. 14 - Explain why the Accounting Department should be...Ch. 14 - Prob. 15DQCh. 14 - What is ecoefficiency?Ch. 14 - Prob. 17DQCh. 14 - Prob. 18DQCh. 14 - Prob. 19DQCh. 14 - What are the four categories of environmental...Ch. 14 - Prob. 21DQCh. 14 - What does full environmental costing mean? Full...Ch. 14 - What information is communicated by the unit...Ch. 14 - Evans Company had total sales of 3,000,000 for...Ch. 14 - Prob. 2CECh. 14 - Ross Company implemented a quality improvement...Ch. 14 - Nabors Company had actual quality costs for the...Ch. 14 - Verde Company reported operating costs of...Ch. 14 - Pinter Company had the following environmental...Ch. 14 - Rachel Boyce, president of a company that...Ch. 14 - Quality attributes such as performance and...Ch. 14 - Stahman, Inc., estimates its hidden external...Ch. 14 - Prob. 10ECh. 14 - Abernathy, Inc., produces two different generators...Ch. 14 - Kang Company reported sales of 3,240,000 in 20x5....Ch. 14 - Gagnon Company reported the following sales and...Ch. 14 - Muskogee Company had sales of 60,000,000 in 20x1....Ch. 14 - Javier Company has sales of 8 million and quality...Ch. 14 - In 20x4, Tru-Delite Frozen Desserts, Inc.,...Ch. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Achieving sustainable development will likely...Ch. 14 - Classify the following environmental activities as...Ch. 14 - At the end of 20x5, Bing Pharmaceuticals began to...Ch. 14 - Prob. 22ECh. 14 - Coyle Pharmaceuticals produces two organic...Ch. 14 - Prob. 24ECh. 14 - Which of the following quality costs is an...Ch. 14 - Which of the following would be a hidden quality...Ch. 14 - Using the Taguchi quality loss function, an...Ch. 14 - Environmental costs are those costs incurred...Ch. 14 - Two products, Product A and Product B, are...Ch. 14 - Kathy Shorts, president of Oliver Company, was...Ch. 14 - Panguitch Company manufactures a component for...Ch. 14 - Gaston Company manufactures furniture. One of its...Ch. 14 - Classify the following quality costs as...Ch. 14 - Wayne Johnson, president of Banshee Company,...Ch. 14 - Recently, Ulrich Company received a report from an...Ch. 14 - In 20x5, Major Company initiated a full-scale,...Ch. 14 - Paper Products Division produces paper diapers,...Ch. 14 - In 2011, Milton Thayne, president of Carbondale...Ch. 14 - Iona Company, a large printing company, is in its...Ch. 14 - Prob. 40PCh. 14 - The following items are listed in an environmental...Ch. 14 - Refer to Problem 14.41. In the environmental...Ch. 14 - The following environmental cost reports for 20x3,...Ch. 14 - Refer to Problem 14.43. In 20x3, Jack Carter,...
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