1.
Prepare an interim quality cost performance report for the year 2015 that compares actual quality costs with budgeted quality costs and comment on the ability of the firm for achieving its quality goals for the year.
1.
Explanation of Solution
Quality cost performance reports: In a quality cost performance report, identification of quality standard is the main element and it has two important elements namely; actual outcomes and expected or standard outcomes.
Interim quality 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.
Prepare an interim quality cost performance report for the year 2015:
Company I | ||||
Interim Performance Report: Quality Costs | ||||
For the Year Ended December 31, 2015 | ||||
Particulars |
Actual Costs (a) |
Budgeted costs (b) |
Variance | |
Prevention costs: | ||||
Fixed: | ||||
Quality planning | $150,000 | $150,000 | $0 | |
Quality training | $20,000 | $20,000 | $0 | |
Quality improvement | $100,000 | $80,000 | $20,000 | U |
Quality reporting | $12,000 | $10,000 | $2,000 | U |
Total prevention costs | $282,000 | 260,000 | $22,000 | U |
Appraisal costs: | ||||
Variable: | ||||
Proofreading | $520,000 | $500,000 | $20,000 | U |
Other inspection | $60,000 | $50,000 | $10,000 | U |
Total appraisal costs | $580,000 | 550,000 | $30,000 | U |
Failure costs: | ||||
Variable: | ||||
Correction of typos | $165,000 | $150,000 | $15,000 | U |
Rework | $76,000 | $75,000 | $1,000 | U |
Plate revisions | $58,000 | $55,000 | $3,000 | U |
Press downtime | $102,000 | $100,000 | $2,000 | U |
Waste | $ 136,000 | $130,000 | $ 6,000 | U |
Total failure costs | $537,000 | $510,000 | $27,000 | U |
Total quality costs | $1,399,000 | $1,320,000 | $79,000 | U |
Table (1)
Every single category and each individual item are equivalent to or higher than the budgeted amounts. Therefore, the firm cannot achieve its budgeted goals for the year.
2.
Prepare a one-period quality performance report for 2015 that compares the actual quality costs of 2014 with the actual costs of 2015 and state the amount of change in profit due to improvement in quality.
2.
Explanation of Solution
Prepare a one-period quality performance report for 2015:
Company I | ||||
Performance Report: Quality Costs | ||||
One-Year Trend | ||||
For the Year Ended December 31, 2015 | ||||
Particulars |
Actual Costs 2015 (a) |
Actual Costs 2014 (b) |
Variance | |
Prevention costs: | ||||
Fixed: | ||||
Quality planning | $150,000 | $140,000 | ($10,000) | U |
Quality training | $20,000 | $20,000 | $0 | |
Quality improvement | $100,000 | $120,000 | $20,000 | F |
Quality reporting | $12,000 | $12,000 | $0 | |
Total prevention costs | $282,000 | $292,000 | $10,000 | F |
Appraisal costs: | ||||
Variable: | ||||
Proofreading | $520,000 | $580,000 | $60,000 | F |
Other inspection | $60,000 | $80,000 | $20,000 | F |
Total appraisal costs | $580,000 | $660,000 | $80,000 | F |
Failure costs: | ||||
Variable: | ||||
Correction of typos | $165,000 | $200,000 | $35,000 | F |
Rework | $76,000 | $131,000 | $55,000 | F |
Plate revisions | $58,000 | $83,000 | $25,000 | F |
Press downtime | $102,000 | $123,000 | $21,000 | F |
Waste | $ 136,000 | $191,000 | $ 55,000 | F |
Total failure costs | $537,000 | $728,000 | $191,000 | F |
Total quality costs | $1,399,000 | $1,680,000 | $281,000 | F |
Table (2)
- The quality cost reduced from 2014 to 2015; therefore, the profit increased to $281,000. There is still considerable improvement even though the budgeted reductions for the year are not met.
- Additionally, the improvement was due to the “reduction of failure costs” which is a positive sign denoting that quality is certainly increasing.
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.
3.
Explanation of Solution
Multiple-period quality trend reports: Multiple-period quality trend reports is a chart or graph that tracks the change in quality from the starting of the program to the present.
Prepare a graph:
Figure (1)
Working notes:
(1)Calculate the percent of sales:
Year |
Quality Costs (a) |
Sales Revenues (b) |
Percent of sales |
2011 | $2,000,000 | $10,000,000 | 20% |
2012 | $1,800,000 | $10,000,000 | 18% |
2013 | $1,815,000 | $11,000,000 | 16.5% |
2014 | $1,680,000 | $12,000,000 | 14% |
2015 | $1,320,000 | $12,000,000 | 11.65% |
Table (3)
4.
Prepare a graph that shows the trend for all four quality cost categories for 2011 through 2015 and state the manner in which the graphs helps management to know that the reduction in total quality costs is attributable to quality improvement.
4.
Explanation of Solution
Prepare a graph:
Figure (2)
“Increases in prevention and appraisal costs” along with simultaneous decrease in failure costs are good indication that in general quality is increasing. It is to be noted, that decreases in external failure costs are mostly difficult to attain without increase in actual quality.
5.
Prepare a long-range quality cost performance report.
5.
Explanation of Solution
Long-range performance report: Long-range performance report compares the “current actual” with the costs that will be allowed if the “zero-defects standard” is being met by assuming that sales level is equal to that of the existing period.
Prepare a long-range quality cost performance report:
Company I | ||||
Performance Report: Quality Costs | ||||
One-Year Trend | ||||
For the Year Ended December 31, 2015 | ||||
Particulars |
Actual Costs 2015 (a) |
Long-Range Target Costs (b) |
Variance | |
Prevention costs: | ||||
Fixed: | ||||
Quality planning | $150,000 | $0 | $150,000 | U |
Quality training | $20,000 | (9)$112,500 | ($92,500) | F |
Quality improvement | $100,000 | $0 | $100,000 | U |
Quality reporting | $12,000 | (10)$26,250 | ( $14,250) | F |
Total prevention costs | $282,000 | $138,750 | $143,250 | U |
Appraisal costs: | ||||
Variable: | ||||
Proofreading | (2)$650,000 | (11)$187,500 | $462,500 | U |
Other inspection | (3) $75,000 | (12)$48,750 | $26,250 | U |
Total appraisal costs | $725,000 | $236,250 | $488,750 | U |
Failure costs: | ||||
Variable: | ||||
Correction of typos | (4)$206,250 | $0 | $206,250 | U |
Rework | (5)$95,000 | $0 | $95,000 | U |
Plate revisions | (6)$72,500 | $0 | $72,500 | U |
Press downtime | (7)$127,500 | $0 | $127,500 | U |
Waste | (8) $170,000 | $0 | $170,000 | U |
Total failure costs | $671,250 | $0 | $671,250 | U |
Total quality costs | $1,678,250 | $375,000 | $1,303,250 | U |
Table (4)
Note: Apart from for prevention costs, which is a fixed cost, actual costs of 2015, are adjusted to a sales level of $15 million.
Workings notes:
(2)Calculate the proofreading costs:
(3)Calculate the other inspection costs:
(4)Calculate the correction of typos costs:
(5)Calculate the rework costs:
(6)Calculate the plate revision costs:
(7)Calculate the press downtime costs:
(8)Calculate the cost of waste:
(9)Calculate the long-range target costs for quality training:
(10)Calculate the long-range target costs for quality reporting:
(11)Calculate the long-range target costs for proofreading:
(12)Calculate the long-range target costs for other inspection:
(13)Calculate the amount of total quality costs:
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Chapter 14 Solutions
Cornerstones Of Cost Management
- Shalimar Company manufactures and sells industrial products. For next year, Shalimar has budgeted the follow sales: In Shalimars experience, 10 percent of sales are paid in cash. Of the sales on account, 65 percent are collected in the quarter of sale, 25 percent are collected in the quarter following the sale, and 7 percent are collected in the second quarter after the sale. The remaining 3 percent are never collected. Total sales for the third quarter of the current year are 4,900,000 and for the fourth quarter of the current year are 6,850,000. Required: 1. Calculate cash sales and credit sales expected in the last two quarters of the current year, and in each quarter of next year. 2. Construct a cash receipts budget for Shalimar Company for each quarter of the next year, showing the cash sales and the cash collections from credit sales. 3. What if the recession led Shalimars top management to assume that in the next year 10 percent of credit sales would never be collected? The expected payment percentages in the quarter of sale and the quarter after sale are assumed to be the same. How would that affect cash received in each quarter? Construct a revised cash budget using the new assumption.arrow_forwardCassara, Inc., had the following quality costs for the years ended December 31, 20X1 and 20X2: At the end of 20X1, management decided to increase its investment in control costs by 40% for each categorys items, with the expectation that failure costs would decrease by 25% for each item of the failure categories. Sales were 12,000,000 for both 20X1 and 20X2. Required: 1. Calculate the budgeted costs for 20X2, and prepare an interim quality performance report. 2. Comment on the significance of the report. How much progress has Cassara made?arrow_forwardJavier Company has sales of 8 million and quality costs of 1,600,000. The company is embarking on a major quality improvement program. During the next three years, Javier intends to attack failure costs by increasing its appraisal and prevention costs. The right prevention activities will be selected, and appraisal costs will be reduced according to the results achieved. For the coming year, management is considering six specific activities: quality training, process control, product inspection, supplier evaluation, prototype testing, and redesign of two major products. To encourage managers to focus on reducing non-value-added quality costs and select the right activities, a bonus pool is established relating to reduction of quality costs. The bonus pool is equal to 10 percent of the total reduction in quality costs. Current quality costs and the costs of these six activities are given in the following table. Each activity is added sequentially so that its effect on the cost categories can be assessed. For example, after quality training is added, the control costs increase to 320,000, and the failure costs drop to 1,040,000. Even though the activities are presented sequentially, they are totally independent of each other. Thus, only beneficial activities need be selected. Required: 1. Identify the control activities that should be implemented, and calculate the total quality costs associated with this selection. Assume that an activity is selected only if it increases the bonus pool. 2. Given the activities selected in Requirement 1, calculate the following: a. The reduction in total quality costs b. The percentage distribution for control and failure costs c. The amount for this years bonus pool 3. Suppose that a quality engineer complained about the gainsharing incentive system. Basically, he argued that the bonus should be based only on reductions of failure and appraisal costs. In this way, investment in prevention activities would be encouraged, and eventually, failure and appraisal costs would be eliminated. After eliminating the non-value-added costs, focus could then be placed on the level of prevention costs. If this approach were adopted, what activities would be selected? Do you agree or disagree with this approach? Explain.arrow_forward
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