Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Chapter 13, Problem 55P

1.

To determine

Prepare quality cost report and pie chart.

1.

Expert Solution
Check Mark

Explanation of Solution

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.

Preparation of quality cost report:

ParticularsYear 1 ($)Year 2 ($)
Prevention costs:  
Quality circles6,00060,000
Design reviews3,00030,000
Quality improvement projects3,000150,000
Total prevention costs (A)12,000240,000
Percentage (E)0.39%7.81%
Detection costs:  
Packaging inspection480,000450,000
Product acceptance60,00042,000
Total detection costs (B)540,000492,000
Percentage (F)17.58%16.02%
Internal failure costs:  
Scrap420,000360,000
Rework540,000480,000
Yield losses240,000150,000
Retesting300,000240,000
Total internal failure costs (C)1,500,0001,230,000
Percentage (G)48.83%40.04%
External failure costs:  
Returned materials240,000240,000
Allowances180,000210,000
Warranty600,000660,000
Total external failure costs (D)1,020,0001,110,000
Percentage (H)33.20%36.13%
Total quality costs (A+B+C+D)3,072,0003,072,000
Total percentage (E+F+G+H)100%100%

Table (1)

Pie chart for year 1:

Managerial Accounting: The Cornerstone of Business Decision-Making, Chapter 13, Problem 55P , additional homework tip  1

Fig (1)

Pie chart for year 2:

Managerial Accounting: The Cornerstone of Business Decision-Making, Chapter 13, Problem 55P , additional homework tip  2

Fig (2)

Analysis of pie charts:

  • The distribution pattern shown in the chart in year 1 is not appropriate.
  • External failure costs and internal failure costs are much higher than their required levels.
  • In comparison with year 1, year 2 is moving towards a right balance; since failure costs are reducing and prevention costs are increasing.

2.

To determine

Present a performance report for year 2 by comparing budgeted and actual figures of year 2. Also, compute the profits that have been increased due to quality improvements.

2.

Expert Solution
Check Mark

Answer to Problem 55P

Increase in profit due to quality improvements is $768,000.

Explanation of Solution

Preparation of quality cost report:

Particulars

Year 1

($)

Year 2

Budgeted

($) (E)

Year 2

Actual

($) (F)

Variance

($) (EF)

Prevention costs:    
Quality circles6,0007,50060,000(52,500)
Design reviews3,0003,75030,000(26,250)
Quality improvement projects3,0003,750150,000(146,250)
Total prevention costs (A)12,00015,000240,000(225,000)
Detection costs:    
Packaging inspection480,000600,000450,000150,000
Product acceptance60,00075,00042,00033,000
Total detection costs (B)540,000675,000492,000183,000
Internal failure costs:    
Scrap420,000525,000360,000165,000
Rework540,000675,000480,000195,000
Yield losses240,000300,000150,000150,000
Retesting300,000375,000240,000135,000
Total internal failure costs (C)1,500,0001,875,0001,230,000645,000
External failure costs:    
Returned materials240,000300,000240,00060,000
Allowances180,000225,000210,00015,000
Warranty600,000750,000660,00090,000
Total external failure costs (D)1,020,0001,275,0001,110,000165,000

Total quality costs

(A+B+C+D)

3,072,0003,840,0003,072,000768,000

Table (2)

Year 2 budgeted figures are computed by dividing the costs of year 1 by sales of year 1 $12,000,000 and multiplying by sales of year 2, $15,000,000.

Increase in profit due to quality improvements is $768,000.

3.

To determine

Compute increase in profits in case quality costs are reduced to 3% of sales revenue.

3.

Expert Solution
Check Mark

Explanation of Solution

Computation of increase in profit:

ParticularsAmount ($)
Existing total quality costs (A)3,072,000
Sales15,000,000

Revised total quality costs (B)

($15,000,000×3%)

450,000
Increase in profit (AB)2,622,000

Table (3)

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Chapter 13 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making

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