Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 19 Balanced Scorecard: Quality and Time
Objective 19.1
1) Which of the following is true of ISO 9000?
A) It is a quality management system comprising different process improvement such as six sigma and
lean manufacturing.
B) It is mandatory for all listed companies in US to get ISO certified.
C) It helps companies monitor, document, and certify the elements of their production processes that lead
to quality.
D) It is a disciplined, data-driven, and statistical approach to improve the quality of products or services
by identifying and removing the causes of defects.
2) Conformance quality ________.
A) is the first step of a quality management system such as ISO 9000
B) is the performance of a product or service according to design and product specifications
C) is making the product according to design, engineering, and manufacturing specifications
D) focuses on how a product meets customer needs and wants
3) The costs of quality ________.
A) are the costs incurred to enhance large scale production
B) are the costs incurred to prevent the production of a low quality product
C) are costs incurred to company due to defective and low quality product
D) include warranty costs, costs of normal spoilage, costs of abnormal spoilage, and scrap costs
4) Costs incurred in precluding the production of products that do not conform to specifications are
________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
5) Appraisal costs ________.
A) are costs incurred to prevent the production of products that do not conform to specifications
B) are costs incurred to detect which of the individual units of products do not conform to specifications
C) are costs incurred on defective products before they are shipped to customers
D) are costs incurred on defective products after they have been shipped to customers
6) Costs incurred on defective products before being shipped to customers are ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
7) Design engineering is an example of ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
8) Spoilage is an example of ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
9) A liability claim is an example of ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
10) Process engineering is an example of ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
11) Product testing is an example of ________.
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
Answer the following questions using the information below:
Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and
requires substantial inspection to keep the machines operating properly. An improperly varnished table
is very expensive to correct. Inspection hours for the 5,000 tables varnished in September totaled 1,500
hours by 8 employees. Eight quarts of varnish were used, on average, for each table. The standard
amount of varnish per table is nine quarts. The cost of inspection for September was equal to the
budgeted amount of $40,000.
12) The $40,000 represents a(n) ________.
A) activity cost pool
B) possible cost allocation base
C) internal failure cost
D) work-in-process control
13) What is the inspection cost per unit?
A) $30.40
B) $8.00
C) $9.00
D) $4,750
14) Which of the following is considered a cost of quality?
A) external failure costs
B) opportunity costs
C) sunk costs
D) contingent liabilities
15) Which of the following is an opportunity cost?
A) lost sales
B) cost of production
C) marginal cost
D) cost of sales
16) Which of the following is a financial measure of quality?
A) operating income growth
B) percentage of highly satisfied customers
C) number of defective units shipped to customers as a percentage of total units shipped
D) interest costs
17) One of the most direct financial measures of quality is the costs of quality.
18) ISO 9000 developed by the International Organization for Standardization is a set of five international
standards for quality management.
19) Quality is defined as the total features and characteristics of a product or a service made or performed
according to specifications to satisfy customers at the time of purchase and during use.
20) Conformance quality is the performance of a product or service relative to its design and product
specifications.
21) In the banking industry, depositing a customer’s check into the wrong bank account is an example of
quality of design failure.
22) Costs of quality (COQ) reports usually consider opportunity costs.
23) ISO 9000 are standards designed to encourage organizations to develop environmental management
systems to reduce environmental costs.
24) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs,
opportunity costs, and sales costs.
25) Appraisal costs are costs incurred to preclude the production of products that do not conform to
specifications.
26) External failure costs are costs incurred on defective products after they have been shipped to
customers.
27) When evaluating alternatives to improve quality, both the relevant benefits as well as the relevant
costs should be considered.
28) Prevention costs include inspection and product testing.
29) Warranty costs is an example of external failure costs.
30) What are ISO 9000 and ISO 14000?
31) The two basic aspects of quality are quality of design and conformance quality. Define and give an
example of each.
32) Ply Corp manufactures doors. Classify each of the following quality costs as prevention costs,
appraisal costs, internal failure costs, or external failure costs.
a. Retesting of reworked products
b. Downtime due to quality problems
c. Analysis of the cause of defects in production
d. Depreciation of test equipment
e. Warranty repairs
f. Lost sales arising from a reputation for poor quality
g. Quality circles
h. Rework direct manufacturing labor and overhead
i. Net cost of spoilage
j. Technical support provided to suppliers
k. Audits of the effectiveness of the quality system
l. Plant utilities in the inspection area
m. Reentering data because of keypunch errors
________ Prevention costs
________ Appraisal costs
________ Internal failure costs
________ External failure costs
33) Dawn and Kim just bought a bed and breakfast inn at a very attractive price. The business had been
doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high
quality business. Now that they are ready to open the inn, they need some advice on quality costs and
management.
Required:
Identify four categories of quality costs. In addition, identify three items that would be classified in each
of the categories.
34) Wilson’s Language School manufactures CDs and DVDs to teach English as a Second Language.
Wilson has just prepared a Cost of Quality Report, and the staff has noticed a decline in prevention costs
as a percentage of total sales over a three-year period. What changes might Wilson expect to see in
appraisal costs as a percentage of sales, internal failure costs as a percentage of sales, and external failure
costs as a percentage of sales given this trend?
35) A quality improvement program is very costly to implement across a large corporation. Why do they
do it? Explain.
Objective 19.2
1) An example of a nonfinancial measure for customer satisfaction is ________.
A) number of customer complaints
B) warranty claims
C) liability claims incurred to the company
D) rework costs due to inefficiency
2) An example of a nonfinancial measure for customer satisfaction is ________.
A) average manufacturing time for key products
B) contribution margin
C) percentage of products that fail soon after delivery
D) time taken on machine repairs and costs incurred
3) A graph of a series of successive observations of a particular step, procedure, or operation taken at
regular intervals of time is a ________.
A) control chart
B) Pareto diagram
C) cause-and-effect diagram
D) fishbone diagrams
4) Statistical quality control includes a control chart that ________.
A) graphs a series of random events of a process
B) plots each observation relative to specified ranges that represent the expected distribution
C) plots control observations over various periods of time
D) plots only those observations outside specified limits
5) As per control charts, nonrandom variations occurs when ________.
A) there is a sudden increase in production
B) chance fluctuations in the speed of equipment cause defective products to be produced
C) defective products are produced as a result of a systematic problem
D) there is a sudden increase in sales
6) A tool which indicates how frequently each type of defect occurs is a ________.
A) control chart
B) Pareto diagram
C) scatter diagram
D) fishbone diagram
7) An important difference between financial measures of quality and nonfinancial measures of quality is
that ________.
A) financial measures of quality tend to be useful indicators of future long-term performance, while
nonfinancial measures have more of a short-term focus
B) nonfinancial measures of quality tend to be useful indicators of future long-term performance, while
financial measures of quality have more of a short-term focus
C) nonfinancial measures are generally too subjective to have any long-term value, while financial
measures are too objective for taxation purposes
D) nonfinancial measures are generally too subjective to have any short-term value, while financial
measures are too objective to have medium-term value
8) Examples of nonfinancial measures of quality include the ________.
A) inspection costs incurred
B) number of customer complaints
C) design engineering costs
D) quality training costs
9) Cause-and-effect diagrams are used in quality management systems to ________.
A) identify and respond to potential reasons of failure
B) indicate how frequently each type of failure occurs
C) distinguish random from nonrandom variations in an operating process
D) evaluate the tradeoffs among prevention costs, appraisal costs, and failure costs
10) A tool that distinguishes random from nonrandom variations in an operating process is a ________.
A) control chart
B) Pareto diagram
C) cause-and-effect diagram
D) time-series graphs
11) When considering customer needs and wants, only financial measures can be used, since they are
easily measured.
12) An example of a financial measure of customer satisfaction would be the percentage of products that
fail soon after delivery.
13) An on-time delivery rate is considered a nonfinancial measure of customer satisfaction.
14) A control chart identifies potential causes of failures or defects.
15) When using a control chart, the observations outside the upper and lower control limits are ordinarily
regarded as nonrandom and worth investigating.
16) The implication of controlling a process at a Six Sigma level is that the process produces only 3.4
defects per million products produced.
17) A Pareto diagram is usually in a bar-chart format, that indicates how frequently each type of defect
occurs, ordered from the most frequent to the least frequent.
18) Six Sigma emphasizes incremental rather than dramatic or disruptive innovation.
19) Percentage of reworked products is an example of a nonfinancial measure of internal business-process
quality.
20) Discuss the methods used to identify quality problems.
21) A corporation can measure its quality performance by using financial or nonfinancial measures of
quality. Discuss the merits of each method and whether the use of one precludes the use of the other.
22) Komerica Corp is committed to its quality program. It works with all areas of the company to
establish sound quality programs within reasonable budget guidelines. For 2015, it has budgeted
$1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per
failed item, while external failure has a total budget of $600,000.
Product Testing has proposed to management a change in the 2015 budget for a new method of testing
products. If management decides to implement the new method, $2 per unit of appraisal costs will be
saved, up to a level of 150,000 tests. No additional savings are expected past the 150,000 level. The new
method involves $95,000 in training costs and $65,000 in yearly testing supplies.
Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per
failed unit. The company’s average external failures are 1% of units sold. The company carries no ending
inventories.
Required:
a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and
800,000 units are tested during the manufacturing process in 2015?
b. How much do internal failure costs change, assuming 500,000 units are tested under the new method
and it reduces the amount of unacceptable units in the manufacturing process by 40%?
c. What would be the change in the external failure budget, assuming external failures are reduced by
60% and the same facts as in part (b)?
23) Northern Corp is concerned about its declining sales, especially the reduction in the number of
customers. For the last two years, its shirts have won industry awards for high quality and trend-setting
styles. At the latest executive managers’ meeting, all were blaming each other for the decline. After much
discussion and presenting some fact-finding information, it was determined that sales relationships were
the cause of most of the problems.
Required:
What may be some of the causes and how can the causes be detected if product quality is not an issue?
24) Baby Care Products has just completed a very successful program of improving quality in its
manufacturing operations. The next step is to improve the operations of its administrative functions,
starting with the accounting information system. As the manager of the accounting operations, you are
requested to begin a quality improvement program.
Required:
What are some possibilities of finding out about the current status of quality in the accounting system?
25) What are control charts and how can inferences be drawn from them?
26) Discuss the means by which a company goes about evaluating and installing a new quality
improvement program.
1) Managers identify the relevant costs and benefits for each solution by focusing on ________.
A) the alternative solution that will derive maximum customer satisfaction
B) how total costs and total revenues will change under each alternative solution
C) how the employees of a company would be able to implement a change
D) how long it will take for the improved program to be fully functional
Answer the following questions using the information below:
Strykerz Corp expects to spend $800,000 in 2015 in appraisal costs if it does not change its incoming
materials inspection method. If it decides to implement a new receiving method, it will save $60,000 in
fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves
$140,000 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2014, 5% of all completed
items had to be reworked. External failure costs average $400 per failed unit. The company’s average
external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a
per order basis and a just-in-time inventory ordering method is used.
2) What is the net effect on appraisal costs for 2015, assuming the new receiving method is implemented
and that 800,000 material units are received?
A) $120,000 increase
B) $170,000 decrease
C) $190,000 decrease
D) $400,000 increase
3) What would be the change in the external failure budget, if 600,000 units are used and assuming
external failures are reduced by 10%.
A) $40,000 increase
B) $250,000 decrease
C) $240,000 decrease
D) $320,000 decrease
Answer the following questions using the information below:
LaCrosse Products has a budget of $900,000 in 2015 for prevention costs. If it decides to automate a
portion of its prevention activities, it will save $80,000 in variable costs. The new method will require
$40,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the
budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000
units.
Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal
costs of $50,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure
rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by
one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The
company’s average external failures average 3% of units sold. The new proposal will reduce this rate by
50%. Assume all units produced are sold and there are no ending inventories.
4) What is the net change in the budget for prevention costs if the procedures are automated in 2015? Will
management agree with the changes?
A) $60,000 decrease, yes
B) $60,000 increase, yes
C) $140,000 increase, no
D) $80,000 decrease, yes
5) How much will appraisal costs change assuming the new prevention methods reduce material failures
by 40% in the appraisal phase?
A) $140,000 decrease
B) $60,000 increase
C) $50,000 decrease
D) $22,500 decrease
6) How much will internal failure costs change if the internal product failures are reduced by 1/3 with the
new procedures?
A) $22,500 decrease
B) $67,500 decrease
C) $500,000 decrease
D) $750,000 decrease
7) How much do external failure costs change if all changes are as anticipated with the new prevention
procedures? Assume all units produced are sold and there are no ending inventories.
A) $121,500 decrease
B) $121,500 increase
C) $243,000 decrease
D) None of these answers is correct.
8) Management has offered to allow the prevention changes if all changes take place as anticipated and
the amounts netted are less than the cost of the equipment. What is the net impact of all the changes
created by the preventive changes?
A) $140,000
B) $(22,500)
C) $(134,000)
D) $(121,500)