Chapter 14: Quality and Environmental Cost Management
193. In 2016, Creative Design, Inc., instituted a quality improvement program. At the end of 2017, the management of
the corporation requested a report to show the amount saved by the measures taken during the year. The actual
sales and actual quality costs for 2016 and 2017 are as follows:
2016
2017
Sales
$125,000
$150,000
Scrap
3,750
3,750
Rework
5,000
2,500
Training program
1,250
1,500
Consumer complaints
2,500
1,250
Lost sales, incorrect labeling
2,000
—
Test labor
3,000
2,000
Inspection labor
6,250
6,000
Supplier evaluation
3,750
3,250
Required:
a. Classify each cost as variable or fixed with respect to sales and compute the variable cost ratio for 2016. Be
careful—costs may change because of quality improvement, not cost behavior.
b. How much did profits increase because of quality improvements made in 2017, assuming all reductions in
quality costs are attributable to quality improvements?
c. Prepare an interim trend quality costs report for Creative Design, Inc.
Chapter 14: Quality and Environmental Cost Management
Chapter 14: Quality and Environmental Cost Management
194. At the beginning of the year, Alejandro Corporation initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the
following data were collected for the current and preceding years:
2016
2017
2018
2019
Reliability engineering
$8,000
$10,000
$15,000
$25,000
Quality training
1,000
2,000
5,000
8,000
Packaging inspections
2,000
3,000
5,000
5,000
Product Acceptance
12,000
10,000
9,000
7,000
Rework
30,000
25,000
18,000
12,000
Reinspection
75,000
65,000
48,000
29,000
Customer complaints
100,000
85,000
62,000
51,000
Warranty and Repair
70,000
50,000
40,000
25,000
Required:
a. Prepare a multiple-year trend report for overall costs of quality.
b. Prepare a multiple-year trend report for each category of quality costs.
c. Graph the results.
Chapter 14: Quality and Environmental Cost Management
Chapter 14: Quality and Environmental Cost Management
195. Define environmental costs and identify the four categories of environmental costs. Give an example of each
category.
Chapter 14: Quality and Environmental Cost Management
196. Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as:
P
D
I
E
N
=
=
=
=
=
Prevention
Detection
Internal Failure
External Failure
none of the above
1.
Cleaning up contaminated soil
2.
Designing processes
3.
Recycling scrap
4.
Auditing environmental activities
5.
Testing for contamination
6.
Losing a lake for recreational use
7.
Measuring contamination levels
8.
Recycling products
9.
Maintaining pollution equipment
10.
Evaluating and selecting suppliers
Designing processes
Recycling scrap
Auditing environmental activities
Testing for contamination
Losing a lake for recreational use
Measuring contamination levels
Recycling products
Maintaining pollution equipment
Evaluating and selecting suppliers
Chapter 14: Quality and Environmental Cost Management
197. Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as:
P
D
I
E
N
=
=
=
=
=
Prevention
Detection
Internal Failure
External Failure
none of the above
1.
Inspecting products and processes
2.
Verifying supplier environmental
3.
Testing for contamination
4.
Obtaining ISO 14001 certification
5.
Carrying out environmental studies
6.
Operating pollution control equipment
7.
Cleaning up a polluted lake
8.
Recycling scrap
9.
Recycling products
10.
Cleaning up oil spills
Chapter 14: Quality and Environmental Cost Management
198. At the beginning of the year, Michelina, Inc., initiated an environmental cost reduction program. To help assess the
impact of the environmental cost reduction improvement program, the following data was collected for the current
and preceding year:
Preceding Year
Current Year
Operating costs
$4,000,000
$4,000,000
Designing products
18,000
20,000
Auditing environmental activities
40,000
64,000
Recycling scrap
200,000
180,000
Restoring land to natural state
360,000
320,000
Operating pollution control equipment
250,000
240,000
Testing for contamination
Required:
80,000
80,000
a. Compute each category of environmental quality costs as a percentage of operating costs for
each year.
Prevention costs
Detection costs Internal
failure costs External
failure costs
b. How much has profit increased as a result of the environmental cost reduction improvements?
Chapter 14: Quality and Environmental Cost Management
199. Amenities Corporation reported the following operating costs and environmental quality costs for the past four
years. Assume that all environmental quality costs are variable and that all changes in the quality cost ratios are
due to an environmental cost reduction program.
Environmental Costs as
Year
Operating Cost
Percent of Operating Costs
1
$2,000,000
23.0
2
2,200,000
20.0
3
2,200,000
16.0
4
2,400,000
12.0
Required:
a. Compute the environmental quality costs for all four years.
b. How much did net income increase from Year 1 to Year 2 because of quality improvements?
From Year 2 to Year 3? From Year 3 to Year 4?
Chapter 14: Quality and Environmental Cost Management
200. At the beginning of the year, Heathrow, Inc., initiated an environmental cost reduction program. To help assess the
impact of the environmental cost reduction improvement program, the following data was collected for the current
and preceding year:
Preceding Year
Operating costs
$2,500,000
Cost reduction, contaminants (ongoing)
187,500
Designing products
10,000
Auditing environmental risks
12,500
Recycling scrap
62,500
Recycling income
125,000
Restoring land to natural state
75,000
Operating pollution control equipment
62,500
Packaging cost reductions ( current year)
150,000
Testing for contamination
100,000
Required:
a. Prepare an environmental financial statement for the year.
Chapter 14: Quality and Environmental Cost Management
201. Maldovar Chemical produces a number of chemical products, two of which are Product A and Product B. The
controller and environmental manager have identified the following environmental activities and costs associated
with the two products:
Product A
Product B
Pounds produced
1,000,000
2,500,000
Packaging materials (pounds)
300,000
150,000
Energy usage (kilowatt hours)
100,000
50,000
Toxic releases (pounds into air)
250,000
50,000
Pollution control (machine hours)
40,000
10,000
Costs of activities:
Using packaging materials
$450,000
Using energy
120,000
Releasing toxins (fines)
60,000
Operating pollution control equipment
140,000
Required:
a. Calculate the environmental cost per pound for each product.
b. Which of the two appears to cause the most degradation to the environment?
Packaging materials
Energy usage
Toxic releases
Pollution control
Total costs
Units
Cost per unit
Chapter 14: Quality and Environmental Cost Management
202. Growfast Fertilizer Company produces a number of chemical products, two of which are Product X and Product Y.
The controller and environmental manager have identified the following environmental activities and costs
associated with the two products:
Product X
Product Y
Gallons produced
312,500
781,250
Energy usage (kilowatt hours)
31,250
15,625
Pollution control (machine hours)
12,500
3,125
Toxic releases (pounds into air)
78,125
15,625
Packaging materials (pounds)
93,750
46,875
Costs of activities:
Using packaging materials
$281,250
Using energy
75,000
Releasing toxins (fines)
37,500
Operating pollution control equipment
87,500
Required:
a. Calculate the environmental cost per pound for each product.
b. Which of the two appears to cause the most degradation to the environment?
Packaging materials
Energy usage
50,000
25,000
Toxic releases
31,250
6,250
Pollution control
Total costs
Units
Cost per unit