Question

Interim Quality Performance Report

Davis, Inc., had the following quality costs for the years ended December 31, 20x4 and 20x5:

	20x4	20x5
Prevention costs:
Quality audits	$60,000	$90,000
Vendor certification	127,500	191,250
Appraisal costs:
Product acceptance	$84,000	$126,000
Process acceptance	93,000	115,000
Internal failure costs:
Retesting	$98,000	$86,000
Rework	204,000	185,000
External failure costs:
Recalls	$152,500	$122,000
Warranty	305,000	302,000

At the end of 20x4, management decided to increase its investment in control costs by 50 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 $12,500,000 for both 20x4 and 20x5.

Required:

1. Calculate the budgeted costs for 20x5.

$

Prepare an interim quality performance report. Enter all answers as positive amounts. If there is no variance enter "0" for your answer. If the budget variance amount is unfavorable select "Unfavorable" in the last column of the table, select "Favorable" if it is favorable, or No effect if there is no change. Round percentage answers to two decimal places. For example, 5.789% would be entered as "5.79".

Davis, Inc.
Interim Standard Performance Report: Quality Costs
For the Year Ended December 31, 20x5
	Actual Costs	Budgeted Costs	Variance	Unfavorable, Favorable or No effect
Prevention costs:
	$	$
Total prevention costs	$	$
Appraisal costs:
	$	$
			$
Total appraisal costs	$	$	$
Internal failure costs:
	$	$	$
Total internal failure costs	$	$	$
External failure costs:
	$	$
Total external failure costs	$	$	$
Total quality costs	$	$	$
Percentage of sales	%	%	%

2. What can be inferred from the report regarding the progress Davis has made?

3. What if sales were $12,500,000 for 20x4 and $15,625,000 for 20x5? What adjustment to budgeted rework costs would be made? (Note: Quality auditing is a discretionary cost and its budget is not affected by the change in sales revenue in 20x5.)

New total budgeted rework costs: $

Answer 1

Davis, Inc.
Interim Standard Performance Report: Quality Costs
For the Year Ended December 31, 20x5
	Actual Costs	Budgeted Costs	Variance	Unfavorable, Favorable or No effect
Prevention costs:
Quality Audit	$90,000	$90,000	$0	No effect
Vendor Certification	191250	191250	0	No effect
Total prevention costs	$281,250	$281,250	$0	No effect
Appraisal costs:
Product acceptance	$126,000	$126,000	$0	No effect
Process acceptance	115000	139500	24500	Favourable
Total appraisal costs	$241,000	$265,500	$24,500	Favourable
Internal failure costs:
Retesting	$86,000	$78,400	$7,600	Unfavourable
Rework	185000	163200	21800	Unfavourable
Total internal failure costs	$271,000	$241,600	$29,400	Unfavourable
External failure costs:
Recalls	$122,000	$122,000	$0	No effect
Warranty	302000	244000	58000	Unfavourable
Total external failure costs	$424,000	$366,000	$58,000	Unfavourable
Total quality costs	$1,217,250	$1,154,350	$62,900	Unfavourable
Percentage of sales	9.74%	9.23%	0.50%

David has not performed as per the budgeted costs of quality. The failure costs has increased by $87,400 compared to the budgeted costs. Though David has incurred less process acceptance costs, he has failed to reduce the failure costs by 20% as expected by the Management.