CASE ON QUALITY COST PERFORMANCE REPORTS

Iona Company, a large printing company, is in its fourth year of a 5-year, quality improvement program. The program began in 2003 with an internal study that revealed the quality costs being incurred. In that year, a 5-year plan was developed to lower quality costs to 10 percent of sales by the end of 2007. Sales and quality costs for each year are as follows:

Â	Sales Revenues	Quality Costs
2003	$10,000,000	$2,000,000
2004	10,000,000	1,800,000
2005	11,000,000	1,815,000
2006	12,000,000	1,680,000
2007	12,000,000	1,320,000

Quality costs by category are expressed as a percentage of sales as follows:

Â	Prevention	Appraisal	Internal Failure	External Failure
2003	1.0%	3.0%	7.0%	9.0%
2004	2.0	4.0	6.0	6.0
2005	2.5	4.0	5.0	5.0
2006	3.0	3.5	4.5	3.0
2007	3.5	3.5	2.0	2.0

The detail of the 2007 budget for quality costs is also provided.

Prevention costs:	Â
Quality planning	$ 150,000
Quality training	20,000
Quality improvement (special project)	80,000
Quality reporting	10,000
Appraisal costs:	Â
Proofreading	500,000
Other inspection	50,000
Failure costs:	Â
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 2007, the company had $12 million in sales. Actual quality costs for 2006 and 2007 are as follows:

 Â	2007 Â	2006 Â
Quality planning	$150,000	$140,000
Quality training	20,000	20,000
Special project	100,000	120,000
Quality reporting	12,000	12,000
Proofreading	520,000	580,000
Other inspection	60,000	80,000
Correction of typos	165,000	200,000
Rework	76,000	131,000
Plate revisions	58,000	83,000
Press downtime	102,000	123,000
Waste	136,000	191,000

Required:

1. Prepare an interim quality cost performance report for 2007 that compares actual quality costs with budgeted quality costs. Comment on the firm’s ability to achieve its quality goals for the year.

2. Prepare a 1-period quality performance report for 2007 that compares the actual quality costs of 2006 with the actual costs of 2007. How much did profits change because of improved quality?

3. Prepare a graph that shows the trend in total quality costs as a percentage of sales since the inception of the quality improvement program.

4. Prepare a graph that shows the trend for all four quality cost categories for 2003 through 2007. How does this graph help management know that the reduction in total quality costs is attributable to quality improvements?

5. Assume that the company is preparing a second 5-year plan to reduce quality costs to 2.5 percent of sales. Prepare a long-range quality cost performance report assuming sales of $15 million at the end of five years. Assume that the final planned relative distribution of quality costs is as follows: proofreading, 50 percent; other inspection, 13 percent; quality training, 30 percent; and quality reporting, 7 percent.