Recently, Ulrich Company received a report from an external consulting group on its qual¬

ity costs. The consultants reported that the company's quality costs total about 21% 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 decided to reduce quality costs to 17% 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 bud¬

geted and actual quality costs. Budgeted costs and sales for the first 2 months of the year are as follows:

Actual sales and actual quality costs were reported for January:

Required:
1. Reorganize the quarterly budgets so that quality costs are grouped in one of four cate¬
gories: appraisal, prevention, internal failure, and external failure. (Essentially, prepare a budgeted cost of quality report.) Also, identify each cost as variable or fixed. (Assume that none are mixed costs.)
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 qual¬
ity costs.

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January February Warranty Scrap Sales Quality costs: Incoming materials inspection Product acceptance Quality planning Field inspection Retesting Allowances New product review Rework $500,000 $600,000 $ 15,000 $ 18,000 10,000 12,000 2,500 2,500 13,000 15,000 2,000 2,000 12,000 14,000 6,000 7,200 7,500 9,000 500 500 9,000 10,800 Complaint adjustment 2,500 2,500 Downtime (defective parts) 5,000 6,000 Quality training 1,000 1,000 Total budgeted costs $ 86,000 $100,500 Quality costs-sales ratio 17.2% 16.75%