Problem:
Granger Company, a large printing company, is in its fourth year of a five year quality improvement program. The program began in 2006 with a internal study that revealed the quality costs being incurred. In that year, a five year plan was developed to lower quality costs to 10 percent of sales by the end of 2010. Sales and quality costs for each year are as follows:
Sales Revenues: Quality Costs:
2006 $10,000,000 $2,000,000
2007 $10,000,000 $1,800,000
2008 $11,000,000 $1,815,000
2009 $12,000,000 $1,680,000
2010 $12,000,000 $1,320,000
Quality costs by category are expressed as a percentage of sales as follows:
Prevention Appraisal Internal Failure External Failure
2006 1% 3% 7% 9%
2007 2% 4% 6% 6%
2008 2.5% 4% 5% 5%
2009 3% 3.5% 4.5% 3%
2010 3.5% 3.5% 2% 2%
The detail of the 2010 budget for quality costs is also provided.
Prevention costs:
Quality Planning $150,000
Quality Training $20,000
Quality Improvement (special project) $80,000
Quality Reporting $10,000
Appraisal costs:
Proofreading $500,000
Other Inspection $50,000
Failure Costs:
Correction of typos $150,000
Rework (because of customer complaints) $75,000
Plate revisions $55,000
Press downtime $100,000
Waste (because of poor work) $130,000
Total Quality Costs: $1,320,000
All prevention costs are fixed; all other quality costs are variable.
During 2010, the company had $12 million in sales. Actual quality costs for 2009 and 2010 are as follows:
2009: 2010:
Quality Planning $140,000 $150,000
Quality Training $20,000 $20,000
Special Project $120,000 $100,000
Quality Reporting $12,000 $12,000
Proofreading $580,000 $520,000
Other Inspection $80,000 $60,000
Correction of typos $200,000 $165,000
Rework $131,000 $76,000
Plate Revisions $83,000 $58,000
Press downtime $123,000 $102,000
Waste $191,000 $136,000
Questions:
1. Prepare an interim quality cost performance report for 2010 that compares actual quality costs with budgeted quality costs. How was the firm's ability to achieve its quality goals for the year?
2. Prepare a single period quality performance report for 2010 that compares the actual quality costs of 2009 with the actual costs of 2010. How much did profits change because of improved quality?