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 2013. Sales and quality costs for each year are as follows:

Sales RevenuesQuality Costs

2009 ............. $10,000,000 .................... $2,000,000

2010 .............. 10,000,000 ...................... 1,800,000

2011 ............. 11,000,000 ...................... 1,815,000

2012 ............. 12,000,000 ...................... 1,680,000

2013* ........... 12,000,000 ....................... 1,320,000

*Budgeted figures.

Quality costs by category are expressed as a percentage of sales as follows:

The detail of the 2013 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 2013, the company had $12 million in sales. Actual quality costs for 2012 and 2013 are as follows:

Required:
1. Prepare an interim quality cost performance report for 2013 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 2013 that compares the actual quality costs of 2012 with the actual costs of 2013. 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 2009 through 2013. 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.

Transcribed Image Text:

Prevention Appraisal Internal Failure External Failure 2009 2010 2011 2012 2013 1.0% 2.0 2.5 3.0 3.5 3.0% 4.0 4.0 3.5 3.5 7.0% 6.0 5.0 4.5 2.0 90% 6.0 5.0 3.0 2.0 2013 2012 Quality planning Owalhty iraining Quality improvement Quality reporting Proofreading Other inspection Correction of typos Rework Plate revisions Press downtime Waste S150,000 20,000 100,000 12,000 520,000 60,000 165,000 76,000 58,000 102,000 136,000 S140,000 20,000 120,000 12,000 580,000 80,000 200,000 131,000 83,000 123,000 191,000