Question

Iona Company, a large printing company, is in its fourth year of a five-year, quality improvement program. The program began in 2009 with an internal study that revealed the quality costs being incurred. In that year, a five-year plan was developed to lower quality costs to 10 percent of sales by the end of 2015. Sales and quality costs for each year are as follows:
Quality costs by category are expressed as a percentage of sales as follows:
The detail of the 2015 budget for quality costs is also provided.
Prevention costs:
Quality planning ............... $ 150,000
Quality training .............. 20,000
Quality improvement (special project) ........ 80,000
Quality reporting .............. 10,000
Appraisal costs:
Proofreading ................. 500,000
Other inspection ............... 50,000
Failure costs:
Correction of typos ............... 150,000
Rework (because of customer complaints) ...... 75,000
Plate revisions ................ 55,000
Press downtime ................ 100,000
Waste (because of poor work) .......... 130,000
Total quality costs ............... $1,320,000
All prevention costs are fixed; all other quality costs are variable. During 2015, the company had $12 million in sales. Actual quality costs for 2014 and 2015 are as follows:
Required:
1. Prepare an interim quality cost performance report for 2015 that compares actual quality costs with budgeted quality costs. Comment on the firm’s ability to achieve its quality 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. How much did profits change because of improved quality?
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.
4. Prepare a graph that shows the trend for all four quality cost categories for 2011 through 2015. How does this graph help management know that the reduction in total quality costs is attributable to quality improvements?
5. Assume that the company is preparing a second five-year plan to reduce quality costs to 2.5 percent of sales. Prepare a long-range quality cost performance report assuming sales of $15 million at the end of five years. Assume that the final planned relative distribution of quality costs is as follows: proofreading, 50 percent; other inspection, 13 percent; quality training, 30 percent; and quality reporting, 7 percent.


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  • CreatedSeptember 01, 2015
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