Question

Nabors Company had actual quality costs for the year ended June 30, 20x5, as given below.

Prevention costs:
Prototype inspection	$ 280,000
Vendor certification	560,000
Total prevention costs	$ 840,000
Appraisal costs:
Process acceptance	$ 295,000
Test labor	340,000
Total Appraisal costs	$ 635,000
Internal failure costs:
Retesting	$ 177,500
Rework	355,000
Total internal failure costs	$ 532,500
External failure costs:
Recalls	$ 245,500
Product liability	545,000
Total external failure costs	$ 790,500
Total quality costs	$2,798,000

At the zero-defect state, Nabors expects to spend $350,000 on quality engineering, $70,000 on vendor certification, and $60,000 on packaging inspection. Assume sales to be $2,500,000.

Required:

1. Prepare a long-range performance report for 20x5. Enter all answers as positive amounts. If the budget variance amount is unfavorable select "Unfavorable" in the last column of the table. Select "Favorable" if it is favorable. Round percentage answers to two decimal places, if rounding is required. For example, 5.789% would be entered as "5.79". Enter "0" as the target cost amount if there would be no cost at the zero-defect state.

Nabors Company
Long-Range Performance Report
For the Year Ended June 30, 20x5
	Actual Costs	Target Costs	Budget Variance	Favorable; or Unfavorable
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. Why are quality costs still present for the zero-defect state?

Answer 1

Answer:

1) Long range performance report is shown as follows:- (Amounts in $)

Nabors Company
Long-Range Performance Report
For the Year Ended June 30, 20X5
	Actual Costs (A)	Target Costs (B)	Budget Variance (B-A)	Favorable or Unfavorable
Prevention costs:
Prototype inspection	280,000	350,000	70,000	Favorable
Vendor certification	560,000	70,000	(490,000)	Unfavorable
Total prevention costs	840,000	420,000	(420,000)	Unfavorable
Appraisal costs:
Process acceptance	295,000	60,000	(235,000)	Unfavorable
Test labor	340,000	0	(340,000)	Unfavorable
Total Appraisal costs	635,000	60,000	(575,000)	Unfavorable
Internal failure costs:
Retesting	177,500	0	(177,500)	Unfavorable
Rework	355,000	0	(355,000)	Unfavorable
Total internal failure costs	532,500	0	(532,500)	Unfavorable
External failure costs:
Recalls	245,500	0	(245,500)	Unfavorable
Product liability	545,000	0	(545,000)	Unfavorable
Total external failure costs	790,500	0	(790,500)	Unfavorable
Total quality costs (a)	2,798,000	480,000	(2,318,000)	Unfavorable
Percentage of sales [(a/Sales)*100]	111.92%	19.2%	(92.72%)	Unfavorable

Notes:-

i) Budget variance is equal to difference between target cost and actual cost. If actual cost is more than the target costs, then it is unfavorable variance and if actual cost is less than the target cost then it is favorable variance.

ii) Percentage of sales is calculated by dividing total quality costs by sales (i.e. $2,500,000).

2) Only prevention costs are there at zero defect state because prevention costs are value added costs that are necessary to maintain the quality gains.