978-1260153132 Chapter 1 Part 6

Solutions Manual, Chapter 1 51

Case 1-26 (continued)

2. The average product cost for one patio set would be:

Direct …………………………………………. $212,000

3. The average product cost per set would increase if the production

4. a. Yes, the president may expect a minimum price of $153, which is the

average cost to manufacture one set. He might expect a price even

higher than this to cover a portion of the administrative costs as well.

The brother-in-law probably is thinking of cost as including only direct

b. The term is opportunity cost. The full, regular price of a set might be

appropriate here, because the company is operating at full capacity,

52 Managerial Accounting, 16th Edition

Case 1-27 (30 minutes)

1. A cost that is classified as a period cost will be recognized on the income

statement as an expense in the current period. A cost that is classified

as a product cost will be recognized on the income statement as an

expense (i.e., cost of goods sold) only when the associated units of

2. The discussion below is divided into two parts—Gallant’s actions to

The decision to postpone expenditures is questionable. It is one thing to

postpone expenditures due to a cash bind; it is quite another to

postpone expenditures in order to hit a profit target. Postponing these

expenditures may have the effect of ultimately increasing future costs

Gallant’s decision to reclassify period costs is not ethical—assuming that

there is no intention of disclosing in the financial reports this

reclassification. Such a reclassification would be a violation of the

principle of consistency in financial reporting and is a clear attempt to

mislead readers of the financial reports. Although some may argue that

Solutions Manual, Appendix 1A 53

Appendix 1A

Cost of Quality

Exercise 1A-1 (10 minutes)

1. Quality of conformance

2. Quality costs

3. Quality circles

4. Prevention costs, appraisal costs

5. Internal failure costs, external failure costs

54 Managerial Accounting, 16th Edition

Exercise 1A-2 (15 minutes)

1.

Prevention

Cost

A

ppraisal

Cost

Internal

Failure

Cost

External

Failure

Cost

a. Product testin

g

………………. X

b. Product recalls ………………. X

c. Rework labor and overhead. X

d. Quality circles ………………… X

e. Downtime caused by

defects ………………………. X

f. Cost of field servicin

g

………. X

g

2. Prevention costs and appraisal costs are incurred in an effort to keep

Solutions Manual, Appendix 1A 55

Problem 1A-3 (60 minutes)

1. An analysis of the company’s quality cost report is presented below

(dollar amounts are in thousands):

Last Year This Year

Amount Percent*

A

moun

t

Percent*

Prevention costs:

Machine maintenance .. $ 70 1.7 10.4 $ 120 2.5 20.3

T

rainin

g

suppliers …….. 0 0.0 0.0 10 0.2 1.7

Quality

circles …………………..

…………………………. 0 0.0 0.0 20 0.4 3.4

T

A

56 Managerial Accounting, 16th Edition

Problem 1A-3 (continued)

From the above analysis it would appear that Mercury, Inc.’s program has

been successful.

 Total quality costs have declined from 16.0% to 12.3% as a

 External failure costs, those costs signaling customer dissatisfaction,

have declined from 9.8% of total production costs to 2.3%. These

 Appraisal costs have increased from 2.4% to 2.7% of total

 Internal failure costs have increased from 2.1% to 4.2% of

production costs. This increase has probably resulted from the

 Prevention costs have increased from 1.7% of total production cost

2. The initial effect of emphasizing prevention and appraisal was to reduce

external failure costs and increase internal failure costs. The increase in

appraisal activities resulted in catching more defective units before they

3. To measure the cost of not implementing the quality program,

management could assume that sales and market share would continue

to decline and then calculate the lost profit. Or, management might

Solutions Manual, Appendix 1A 57

Problem 1A-4 (60 minutes)

1. Florex Company

Quality Cost Report

Last Year This Year

Amount

(in

thousands)

Percent

of Sales

Amount

(in

thousands)

Percent

of Sales

Prevention costs:

Quality en

g

ineerin

g

………. $ 420 0.56 $ 570 0.76

A

ppraisal costs

Inspection ………………….. 750 1.00 900 1.20

Product testin

g

……………. 810 1.08 1,200 1.60

Supplies used in testin

g

… 30 0.04 60 0.08

Depreciation of testin

g

equipment ……………….. 210 0.28 240 0.32

T

Internal failure costs:

Net cost of scrap …………. 630 0.84 1,125 1.50

Rework labor ………………. 1,050 1.40 1,500 2.00

External failure costs:

Cost of field servicing ……. 1,200 1.60 900 1.20

Warranty repairs …………. 3,600 4.80 1,050 1.40

T

58 Managerial Accounting, 16th Edition

Problem 1A-4 (continued)

2.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Last Year This Year

Quality Costs (in thousands)

External Failure

Internal Failure

Appraisal

Prevention

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Last Year This Year

Quality Costs as a Percentage of

Sales

External Failure

Internal Failure

Appraisal

Prevention

Solutions Manual, Appendix 1A 59

Problem 1A-4 (continued)

3. The overall impact of the company’s increased emphasis on quality over

the past year has been positive in that total quality costs have

decreased from 16% of sales to 13.6% of sales. Despite this

improvement, the company still has a poor distribution of quality costs.

Probably due to the increased spending on prevention and appraisal

activities during the past year, internal failure costs have increased by

one half, going from $2.4 million to $3.6 million. The reason internal

failure costs have gone up is that, through increased appraisal activity,

If the company continues its emphasis on prevention and appraisal—

and particularly on prevention—its total quality costs should continue to

decrease in future years. Although internal failure costs are increasing