Question

Interim Quality Performance Reports

Good quality cost management requires that quality costs be reported and controlled (control having a cost reduction emphasis). Control enables managers to compare actual outcomes with standard outcomes to gauge performance and take any necessary corrective actions. The total quality management standard is the robust zero-defects standard. This standard requires that goods and services be produced that meet the targeted value of specified quality characteristics. Achieving zero defects typically requires years and so a variety of quality performance reports are used to measure the progress of a company’s quality improvement program. One such report is the interim standard report. This report measures progress by comparing this year’s quality costs to the budgeted quality costs for the year. The budgeted quality costs are a reduction in the prior year’s quality costs resulting from planned quality improvements.

Apply the Concepts

The actual quality costs are provided for Wilson Company for the years ended June 30, Year 1 and June 30, Year 2:

	Year 1	Year 2
Prevention costs:
Quality Training	$102,400	$128,000
Reliability engineering	204,800	256,000
Appraisal costs:
Materials inspection	$106,240	$134,400
Process acceptance	121,600	153,600
Internal failure costs:
Scrap	$88,000	$80,000
Rework	193,000	160,000
External failure costs:
Customer complaints	$130,000	$104,000
Warranty	295,000	264,000

At the end of Year 1, management decided to increase its investment in control costs by 25 percent for each category’s items with the expectation that failure costs would decrease by 20 percent for each item of the failure categories. Sales were $12,800,000 for both Year 1 and Year 2.

1. Prepare the budgeted costs for Year 2, and prepare an interim quality performance report by completing the following table (round all budgeted amounts to the nearest dollar and percentages to two decimal places):

Wilson Company Interim Standard Performance Report: Quality Costs
For the Year Ended June 30, Year 2
	Actual Costs		Budgeted Costs		Variance
Prevention costs:
Quality Training	$		$		$
Reliability engineering
Total prevention costs	$		$		$
Appraisal costs:
Materials inspection	$		$		$
Process acceptance
Total appraisal costs	$		$		$
Internal failure costs:
Scrap	$		$		$
Rework
Total internal failure costs	$		$		$
External failure costs:
Customer complaints	$		$		$
Warranty
Total external failure costs	$		$		$
Total quality costs	$		$		$
Percentage of sales	%		%		%

Answer 1

Wilson Company Interim Standard Performance Report: Quality Costs
For the Year Ended June 30, Year 2
	Actual Costs	Budgeted Costs	Variance
Prevention costs:
Quality Training	1,28,000	128000	0
Reliability engineering	2,56,000	256000	0
Total prevention costs	3,84,000	3,84,000	0
Appraisal costs:
Materials inspection	1,34,400	132800	1,600	U
Process acceptance	1,53,600	152000	1,600	U
Total appraisal costs	2,88,000	2,84,800	3,200	U
Internal failure costs:
Scrap	80,000	70400	9,600	U
Rework	1,60,000	154400	5,600	U
Total internal failure costs	2,40,000	2,24,800	15,200	U
External failure costs:
Customer complaints	1,04,000	104000	0
Warranty	2,64,000	236000	28,000	U
Total external failure costs	3,68,000	3,40,000	28,000	U
Total quality costs	12,80,000	12,33,600	46,400	U
Percentage of sales = 1,241,040/12,800,0000	10.00%	9.64%	0.36%	U
Year 2 Budgeted Control Cost = Year 1 actual control cost × 1.25
Year 2 Budgeted Failure Cost =Year 1 actual failure cost × (1-20%)