EBK CORNERSTONES OF COST MANAGEMENT
EBK CORNERSTONES OF COST MANAGEMENT
3rd Edition
ISBN: 9781305147102
Author: MOWEN
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 14, Problem 2CE

1.

To determine

Calculate the budgeted costs for 2015 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 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

(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}=(Preventioncostsofqualitycostsduring2014×Increaseininvestment)=$60,000×1.5(1)=$90,000

(3)Calculate the budgeted cost of vendor certification:

Budgeted cost of vendor certification}=(Preventioncostofvendorcertificationduring2014×Percentageofincreaseininvestment)=$120,000×1.5(1)=$180,000

(4)Calculate the budgeted cost of product acceptance:

Budgeted cost of Productacceptance}=(Appraisalcostofproductacceptanceduring2014×Percentageofincreaseininvestment)=$90,000×1.5(1)=$135,000

(5)Calculate the budgeted cost of process acceptance:

Budgeted cost of Productacceptance}=(Appraisalcostofprocessacceptanceduring2014×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=(Internalfailurecostsofretestingduring2014×Rateofdecreaseinfailurecost)=$102,000×0.8(6)=$81,600

(8)Calculate budgeted cost of rework:

Budgetedcostofrework=(Internalfailurecostsofreworkduring2014×Decreaseinfailurecost)=$216,000×0.8(6)=$172,800

(9)Calculate budgeted cost of recalls:

Budgetedcostofrecalls=(Externalfailurecostofrecallsduring2014×Decreaseinfailurecosts)=$150,000×0.8(6)=$120,000

(10)Calculate the budgeted cost of warranty:

Budgetedcostofwarranty=(Externalfailurecostofwarrantyduring2014×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 2015 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 an “optional fixed cost” and there its budget will not be influenced by changes in sales variance.

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Chapter 14 Solutions

EBK CORNERSTONES OF COST MANAGEMENT

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 - Prob. 1CECh. 14 - Prob. 2CECh. 14 - Prob. 3CECh. 14 - Prob. 4CECh. 14 - Prob. 5CECh. 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 - Prob. 12ECh. 14 - Gagnon Company reported the following sales and...Ch. 14 - Prob. 14ECh. 14 - Javier Company has sales of 8 million and quality...Ch. 14 - Prob. 16ECh. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Achieving sustainable development will likely...Ch. 14 - Classify the following environmental activities as...Ch. 14 - Prob. 21ECh. 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 - Prob. 30PCh. 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 - Prob. 34PCh. 14 - Recently, Ulrich Company received a report from an...Ch. 14 - Prob. 36PCh. 14 - Prob. 37PCh. 14 - Prob. 38PCh. 14 - Prob. 39PCh. 14 - Prob. 40PCh. 14 - The following items are listed in an environmental...Ch. 14 - Prob. 42PCh. 14 - Prob. 43PCh. 14 - Prob. 44P
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