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 21percent 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:
The following 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 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 quality costs.
Step by Step Answer:
Cost Management Accounting And Control
ISBN: 9780324233100
5th Edition
Authors: Don R. Hansen, Maryanne M. Mowen