Recently, Ulrich Company received a report from an external consulting group on its quality costs. The consultants

Question:

Recently, Ulrich Company received a report from an external consulting group on its quality costs. The consultants reported that the company's quality costs total about 21 percent of its sales revenues. Somewhat shocked by the magnitude of the costs, Rob Rustin, president of Ulrich Company, decided to launch a major quality-improvement program. For the coming year, management planned to reduce quality costs to 17 percent of sales revenues. Although the amount of reduction was ambitious, most company officials believed that the goal could be realized. To improve the monitoring of the quality improvement program, Rob directed Pamela Golding, the controller, to prepare quarterly performance reports comparing budgeted and actual quality costs. Budgeted costs and sales for the first two months of the year are as follows:

The following actual sales and actual quality costs were reported for January:
Sales ......... $550,000
Quality costs:
Warranty ......... 17,500
Scrap .......... 12,500
Incoming materials inspection . 2,500
Product acceptance ..... 14,000
Quality planning ........ 2,500
Field inspection ...... 14,000
Retesting ......... 7,000
Allowances ....... 8,500
New product review .... 700
Rework ........ 11,000
Complaint adjustment ... 2,500
Downtime (defective parts) . 5,500
Quality training ...... 1,000

Required:
1. Reorganize the quarterly budgets so that quality costs are grouped in one of four categories: appraisal, prevention, internal failure, or external failure. (Essentially, prepare a budgeted cost of quality report.) Also, identify each cost as variable or fixed. (Assume that no costs are mixed.)
2. Prepare a performance report for January that compares actual costs with budgeted costs. Comment on the company's progress in improving quality and reducing its qualitycosts.