Cornerstones of Cost Management Study Set 4
Quiz 14 :
Quality and Environmental Cost Management
(1) Quality Cost Report: Quality cost report is important for the organization regarding improving and controlling the quality costs. First quality costs are categorized into four types: (1) Prevention costs (2) Detection (Appraisal) costs (3) Internal failure costs (4) External failure costs Quality Costs Report of Evans Company For the year ended 2013 Note: • Total sales is $3,000,000 • Prevention costs is 1.5% ($45,000 / $$3,000,000) and like wise • Percentage of sales is (Cost / Total Sales) 100 Therefore, the report clearly indicates that quality costs are too high 25% of sales which is much greater than the desired 2 to 4 percent of sales that prevails for companies with good quality performance. (2) Prepare the bar graph and pie chart: Report Analysis: • As per the data Failure Costs are 86% which is too high • Compared to 14% relates to prevention cost and the appraisal costs • It needs to invest more in control activities to drive down failure costs • Total percentage is 6% (1.5 / 25) 100 and like wise • Total prevention cost and the appraisal costs is 14% (6% + 8%)• While Failure Costs are 86% (40% + 46%)Table showing total percent (3) Conclusion: • Reduction in the quality costs is due to the quality improvement, the 7.5% percent level reveals that the company is producing at a very high quality level. • If quality costs are with the range of 2 to 4 percent than no failure costs, then the company has effectively and practically achieved Zero defects stage. • It should be better to reduce the failure costs for the development of the firm.
Difference between quality of design and quality of conformance: Quality of design: quality of design is a process of evaluating the standard of efficiency of the design activity, of judging operational needs of the product and inclusion of them into product design process which will be changed into an ultimate product under production process. Therefore, we can say quality of design is a process concerned with product features. Quality of conformance: quality of conformance is a process of evaluating the standard of efficiency of the design as well as production process influencing the manufacturing needs and functional features by taking into account the attainment of functional control boundaries, limit of acceptance of product, and production goals. Simply speaking, it is a method to determine, to what extent product meets its specifications.
(1) Calculate the budgeted cost for 2013: Interim Quality Performance Report: • For most of the firms zero defects is a long range goals of the firm • Only quality can achieved these goals. • It takes years to achieve these goals. • Every performance must be communicated to the managers and the employees to achieve the target. Davis, Inc. Interim Standard Performance Report, Quality Costs For the year ended 2013 Note: • If Actual Costs is greater than Budgeted costs, than balances is Unfavorable. • If Actual Costs is less than Budgeted costs, than balances is Favorable. • Total sales are $12,000,000 for both the year 2012 and 2103.• Percentage of sales is (Cost / Total Sales) 100 • In 2012 Actual total costs are 50% Increases • In 2012 Failure Cost are 20% Decrease • Quality prevention costs for Budgeted is $90,000 ($60,000 150%)• Retesting internal Failure costs for Budgeted is $81,600 ($102,000 80%)(2) Significance of the Report: Davis has come very close to meeting the planned outcomes (only 0.36 percent short overall). So, management's belief is that investing an additional 50% in control costs would produce a 20% reduction in failure costs seems to be validated. There is variance a only 0.36 U which is not significant. Hence, management takes corrective action to overcome this situation. (3) Adjustments for Davis performance: • Scrap would not be constant it varies with the sales volume. • As the sales increases scrap increases. • Thus, a 25% increases in sales would cause a 20% increases in budgeted scrap costs. • Increases in sales 25% ($3,000,000 / $12,000,000) 100 • Budgeted scrap costs is $97,920 ($81,600 120%)• This would create favorable balances $7,920 F. • Actual costs are $90,000 and Budgeted costs are $97,920. • All the variable costs would have increased budgets, and the budgeted variances would be more favorable than initially calculated. • Quality training is likely fixed costs and so its budget would not be affected by the changes in the sales revenue.