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	$65,000	$97,500
Vendor certification	123,500	185,250
Appraisal costs:
Product acceptance	$91,000	$136,500
Process acceptance	99,000	110,000
Internal failure costs:
Retesting	$92,000	$96,000
Rework	204,000	173,000
External failure costs:
Recalls	$140,000	$112,000
Warranty	325,000	294,000

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 $11,500,000 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 $11,500,000 for 20x4 and $14,375,000 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

		Budgeted Costs for 2015
			Budgeted Cost	Calculation
		Prevention Costs:
		Quality Audit	$97,500	(65000*1.5)
		Vendor Certification	$184,500	(123000*1.5)
		Appraisal Costs:
		Product acceptance	$136,500	(91000*1.5)
		Process acceptance	$148,500	(99000*1.5)
		Internal failure Costs
		Retesting	$73,600	(92000*0.8)
		Rework	$163,200	(204000*0.8)
		External failure costs
		Recalls	$112,000	(140000*0.8)
		Warranty	$260,000	(325000*0.8)
		Total	$1,175,800
		For the Year Ended December 31, 20x5
			Actual Costs	Budgeted Costs	Variance	Unfavorable, Favorable or No effect
		Prevention costs:
		Quality Audit	$97,500	$97,500	$0	Noeffect
		Vendor Certification	$185,250	$184,500	$750	Unfavorable
		Total prevention costs	$282,750	$282,000	$750	Unfavorable
		Appraisal costs:
		Product acceptance	$136,500	$136,500	$0	Noeffect
		Process acceptance	$110,000	$148,500	($38,500)	Favorable
		Total appraisal costs	$246,500	$285,000	($38,500)	Favorable
		Internal failure costs:
		Retesting	$96,000	$73,600	$22,400	Unfavorable
		Rework	$173,000	$163,200	$9,800	Unfavorable
		Total internal failure costs	$269,000	$236,800	$32,200	Unfavorable
		External failure costs:
		Recalls	$112,000	$112,000	$0	Noeffect
		Warranty	$294,000	$260,000	$34,000	Unfavorable
		Total external failure costs	$406,000	$372,000	$34,000	Unfavorable
		Total quality costs	$1,204,250	$1,175,800	$28,450	Unfavorable
		Percentage of sales	10.47%	10.22%	0.25%	Unfavorable
			(1204250/11500000)	(1175800/11500000)
	2	Progress made
		Total Cost of Quality is higher compared to20x4
		Cost of failure has not reduced as budgeted
	3	If Sales in 20x5	$14,375,000
		Budgeted cost of failures need to be adjusted upwards proportional to sales
		Budgeted Rework cost with Sales=$11500000=		$608,800	(236800+372000)
		Budgeted Rework cost with Sales=$14375000=		$761,000	608800*(14375000/11500000)