Problem 14.35 Quality Cost Report, Interim Performance Report

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 monthly performance reports comparing budgeted and actual quality costs. Budgeted costs and sales for the first two months of the year are as follows:

	January		February
Sales	$ 500,000		$ 600,000
Quality costs:
Warranty	$ 15,000		$ 18,000
Scrap	10,000		12,000
Incoming materials inspection	2,500		2,500
Product acceptance	13,000		15,000
Quality planning	2,000		2,000
Field inspection	12,000		14,000
Retesting	6,000		7,200
Allowances	7,500		9,000
New product review	500		500
Rework	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 cost-to-sales ratio	17.20	%	16.75	%

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

1. Reorganize the monthly 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.)

	january	february
prevention costs:
quality planning
new product review
quality training
total prevention costs
appraisal costs:
material inspection
product acceptance
field inspection
total appraisal costs
internal failure costs:
scrap
retesting
rework
downtown
total internal failure costs
external failure costs:
warranty
allowance
complaint adjustment
total external failure costs
total quality costs

2. Prepare a performance report for January that compares actual costs with budgeted costs. If an amount is zero, enter "0". If variance amount is unfavorable enter "U" and enter "F", if it is Favorable. If there is no variance, enter "NA". All values should be entered as positive.

	actual costs	budgeted costs	budget variance
prevention costs:
quality planning
new product review
quality training
total prevention costs
appraisal costs:
material inspection
product acceptance
field inspection
total appraisal costs
internal failure costs:
scrap
retesting
rework
downtown
total internal failure costs
external failure costs:
warranty
allowance
complaint adjustment
total external failure costs
total quality costs