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 decided 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:

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 (V) or fixed (F). (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 quality costs.LO1

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January February Sales Quality costs: Warranty Scrap $500,000 $600,000 $ 15,000 $ 18,000 10,000 12,000 Incoming materials inspection Product acceptance 2,500 2,500 13,000 15,000 Quality planning 2,000 2,000 Field inspection Retesting Allowances New product review Rework 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% The following actual sales and actual quality costs were reported for January: