Hasbro, Inc. (“Hasbro”) prides itself on high-quality output, especially in its film and television operations. The senior management team believe that this is a key competitive advantage, and this partly explains the acquisition of eOne during 2021. Indeed, eOne has a straightforward ‘Cost of Quality’ reporting system, and Hasbro wishes to adopt something similar. As part of the eOne transaction, Hasbro acquired the rights to one of the world’s favourite animated shows: Peppa Pig. The show revolves around Peppa, an anthropomorphic female pig, and her family and peers. There is a dedicated animated film production studio dedicated to Peppa Pig – Peppa Pig Productions – and filming of the eighth series has just finished. Recording takes place across three periods of roughly 4 months each.

You are a management accountant at Peppa Pig Productions and you have been asked to explain and demonstrate to a Hasbro colleague the basics of a Cost of Quality reporting system. In advance of your meeting, you have collected the following information:

• Due to a just-in-time inventory system, there are no stocks of materials, work-inprogress, or finished goods held in the studio.

• At the beginning of the filming schedule, the plan for the production of Season Eight of Peppa Pig was as follows:

o Each minute of Peppa Pig was expected to require the following input materials: 18 hours of drawing labour at $40 per hour, and 9 hours of production labour at $30 per hour.

o Variable costs per minute of Peppa Pig (excluding labour) were estimated at $125.

o Fixed costs of the production facility for the series filming period were expected to be $225,000.

o It was anticipated that 10% of the minutes recorded would be defective and hence need to be scrapped.

• There are many critics of Peppa Pig. Indeed, the show has been banned in some countries on the basis that it supports a “gang culture” narrative. As such, it is estimated that Netflix – the sole customer – will demand Peppa Pig Productions replace, free of charge, those minutes which are deemed by Netflix’s management to be defective/offensive. This is expected to occur at a rate of 2% of the amount invoiced per minute.

Hasbro, and by extension Peppa Pig Productions, is pursuing a total quality management philosophy. Consequently, all losses will be treated as abnormal in recognition of a zero-defect policy and will be valued at variable cost of production. Actual statistics for each of the three periods are shown below. No changes have occurred for the planned price levels for labour, variable costs, or fixed overhead costs.

Table: Actual Statistics for the Production of Season 8 of Peppa Pig

Period 1 Period 2 Period 3

Invoiced to Netflix (minutes) 540 550 500

Worked-on in the process (minutes) 612 620 540

Total costs:

Labour: Drawing and Production 605,880 613,800 534,600

Variable cost of production ($) (excl. labour) 76,500 77,500 67,500

Fixed cost ($) 225,000 210,000 232,000

Required

i. Prepare an analysis that shows whether the actual Period 1 results reconcile with the planned levels in terms of (a) minutes invoiced to Netflix, and (b) labour and variable costs per minute. Explain your treatment of numbers in the reconciliation, and comment on the outcomes.

ii. Briefly explain the concepts of internal and external failure costs, and how they relate to Peppa Pig Productions. Then, use your analysis in part (i) above in order to calculate the value of the planned level of each of internal and external failure costs for Period 1.

You have also been supplied with the following additional information:

Actual replacement minutes required to satisfy Netflix were:

• 15 minutes in Period 2, and

• 9 minutes in Period 3.

Peppa Pig Productions authorised additional expenditure during periods 2 and 3 as follows:

• Period 2: Production accuracy checks of $50,000 and staff training of $12,000.

• Period 3: Production accuracy checks of $50,000, $5,000 of quality inspection costs, staff training of $12,000, and $14,000 of additional planned maintenance of production equipment.


iii. Prepare an analysis for each of periods 2 and 3 which shows how, if at all, the number of minutes invoiced to Netflix reconciles with those worked-on in the production process. (Note: The analysis should show the changes from the planned quantity of process losses and changes from the planned quantity of replacement of defective/offensive minutes in Netflix’s hands.) Show all workings and state clearly any assumptions.

iv. Prepare a cost of quality report for each of periods 2 and 3.

v. Analyse the results generated in response to requirements (i), (ii), (iii), and (iv). Following this, critically discuss FOUR key ways in which the management accounting team at Peppa Pig Productions might integrate this information in their planning and control activities.

vi. List and explain FOUR reasons why Hasbro’s senior management team should convince each of their divisions to roll out a cost of quality reporting system, and FOUR reasons why it might judge cost of quality reporting not to be important.

Answer rating: 100% (QA)

i The planned levels of minutes invoiced to Netflix and labour and variable costs per minute were 540 minutes and 40hour for drawing and production labour and 30hour for production labour and 125 for ... View the full answer