-
Cost Accounting, 14e
(Horngren/Datar/Rajan)
Chapter 19 Balanced Scorecard:
Quality, Time, and the Theory of Constraints
Objective 19.1
1) Quality management provides an
important competitive edge because it:
A) reduces costs
B)
increases customer satisfaction
C)
often results in substantial savings and higher
revenues in the short run
D) All of these answers are correct.
Answer: D
Diff: 1
Terms: quality
Objective:
1
AACSB: Ethical reasoning
2) Quality of design measures how
closely the characteristics of products or
services match the needs and
wants of
customers. Conformance quality:
A)
measures the same things
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 fitness
of uses from a customer perspective
Answer: B
Diff: 1
Terms: design quality
Objective: 1
AACSB:
Ethical reasoning
3) Which
of the following FAIL to satisfy conformance
quality?
A) machines that fail to meet
the needs of customers
B) machines
that break down
C) depositing a
customer's check into the correct account
D) All of these answers are correct.
Answer: B
Diff: 2
Terms: conformance quality
Objective: 1
AACSB:
Reflective thinking
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
Answer: A
Diff: 2
Terms: conformance quality, prevention
costs
Objective: 1
AACSB:
Reflective thinking
1
Copyright ? 2012 Pearson Education,
Inc.
5) Costs
incurred in detecting which of the individual
units of products do NOT conform to specifications
are:
A) prevention costs
B) appraisal costs
C)
internal failure costs
D) external
failure costs
Answer: B
Diff: 2
Terms: conformance
quality, appraisal costs
Objective: 1
AACSB: Reflective thinking
6) Costs incurred by a nonconforming
product detected before it is shipped to customers
are:
A) prevention costs
B) appraisal costs
C)
internal failure costs
D) external
failure
Answer: C
Diff: 2
Terms: conformance quality, internal
failure costs
Objective: 1
AACSB: Reflective thinking
7) Preventive equipment maintenance is
an example of:
A) prevention costs
B) appraisal costs
C)
internal failure costs
D) external
failure costs
Answer: A
Diff: 1
Terms: prevention
costs
Objective: 1
AACSB:
Reflective thinking
8) Spoilage is an
example of:
A) prevention costs
B) appraisal costs
C)
internal failure costs
D) external
failure costs
Answer: C
Diff: 2
Terms: internal
failure costs
Objective: 1
AACSB: Reflective thinking
2
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Education, Inc.
9) A
liability claim is an example of:
A)
prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
Answer: D
Diff: 2
Terms: external failure costs
Objective: 1
AACSB:
Reflective thinking
10)
Design engineering is an example of:
A) prevention costs
B)
appraisal costs
C) internal failure
costs
D) external failure costs
Answer: A
Diff: 2
Terms: external failure costs
Objective: 1
AACSB:
Reflective thinking
11)
Rework is an example of:
A) prevention
costs
B) appraisal costs
C) internal failure costs
D) external failure costs
Answer: C
Diff: 2
Terms: external failure costs
Objective: 1
AACSB:
Reflective thinking
3
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Inc.
Answer the following
questions using the information below:
Monticello Furniture 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 1,250
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 $$38,000.
12) The $$38,000 represents
a(n):
A) activity cost pool
B) possible cost allocation base
C) internal failure cost
D)
work-in-process control
Answer: A
Diff: 2
Terms: costs of
quality (COQ)
Objective: 1
AACSB: Analytical skills
13) What is the inspection cost per
unit?
A) $$30.40
B) $$7.60
C) $$3,800
D) $$4,000
Answer: B
Explanation: B)
Rate per unit = $$38,000/5,000 units = $$7.60 per
unit
Diff: 3
Terms: costs
of quality (COQ)
Objective: 1
AACSB: Analytical skills
14) Cost of quality reports usually do
NOT consider:
A) external failure
costs
B) opportunity costs
C) internal failure costs
D) appraisal costs
Answer:
B
Diff: 2
Terms: costs of
quality (COQ)
Objective: 1
AACSB: Reflective thinking
4
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Education, Inc.
15) Examples
of opportunity costs include:
A) lost
sales
B) forgone contribution margin
C) lower production
D) All
of these answers are correct.
Answer:
D
Diff: 2
Terms: costs of
quality (COQ)
Objective: 1
AACSB: Reflective thinking
16) The cost of quality measure has all
of the following advantages EXCEPT:
A) being a useful measure of comparing
different quality improvement projects
B) serving as a common denominator for
evaluating trade-offs among prevention and failure
costs
C) focusing on how costly poor
quality can be
D) being in existence
in almost every production circumstance
Answer: D
Diff: 2
Terms: costs of quality (COQ)
Objective: 1
AACSB:
Reflective thinking
17)
Shortening delivery times is a minor part of the
quality improvement process.
Answer: FALSE
Explanation:
Shortening delivery times is a major part of the
quality improvement process.
Diff: 2
Terms: quality
Objective: 1
AACSB:
Analytical skills
18) ISO
9000 developed by the International Organization
for Standardization is a set of five international
standards for quality management
adopted by more than 85 countries.
Answer: TRUE
Diff: 2
Terms: quality
Objective:
1
AACSB: Multiculturalism and
diversity
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.
Answer: TRUE
Diff: 2
Terms: quality
Objective:
1
AACSB: Ethical reasoning
5
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Education, Inc.
20)
Conformance quality is the performance of a
product or service relative to its design and
product
specifications.
Answer: TRUE
Diff: 2
Terms: conformance quality
Objective: 1
AACSB:
Analytical skills
21) In
the banking industry, depositing a customer's
check into the wrong bank account is an example of
quality of design failure.
Answer: FALSE
Explanation:
This is an example of conformance quality failure.
Diff: 2
Terms: conformance
quality
Objective: 1
AACSB:
Communication
22) Costs of
quality (COQ) reports usually do NOT consider
opportunity costs.
Answer: TRUE
Diff: 2
Terms: costs of
quality (COQ)
Objective: 1
AACSB: Analytical skills
23) Design quality refers to the
performance of a product or service relative to
its design and product
specification.
Answer: FALSE
Explanation:
Conformance quality refers to the performance of a
product or service relative to its design
and product specification.
Diff: 2
Terms: design
quality, conformance quality
Objective:
1
AACSB: Analytical skills
24) Costs of Quality (COQ) are
classified into four categories: prevention costs,
appraisal costs,
inspection costs, and
warranty costs.
Answer: FALSE
Explanation: Costs of Quality (COQ)
are classified into four categories: prevention
costs, appraisal costs,
internal
failure costs, and external failure costs.
Diff: 2
Terms: costs of
quality (COQ)
Objective: 1
AACSB: Analytical skills
6
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Education, Inc.
25)
Appraisal costs are costs incurred to preclude the
production of products that do NOT conform to
specifications
Answer:
FALSE
Explanation: Prevention costs
are costs incurred to preclude the production of
products that do not
conform to
specifications
Diff: 2
Terms: prevention, appraisal, internal
failure, and external failure costs
Objective: 1
AACSB:
Analytical skills
26)
Internal failure costs are costs incurred on
defective products
after
they have been shipped to
customers
Answer: FALSE
Explanation: External failure costs
are costs incurred on defective products
after
they have been shipped
to customers
Diff: 2
Terms: prevention, appraisal, internal
failure, and external failure costs
Objective: 1
AACSB:
Analytical skills
27) When
evaluating alternatives to improve quality, both
the relevant benefits as well as the
releva
nt
costs should be
considered.
Answer: TRUE
Diff: 1
Terms: quality
Objective: 1
AACSB:
Analytical skills
28)
Prevention costs include inspection and product
testing.
Answer: TRUE
Diff:
1
Terms: quality
Objective:
1
AACSB: Ethical reasoning
29) Warranty costs are an example of
internal failure costs.
Answer: FALSE
Explanation: Warranty costs are an
example of external failure costs.
Diff: 2
Terms: Balanced
Scorecard
Objective: 1
AACSB: Communication
7
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Education, Inc.
30) Write a
paragraph outlining how a manufacturer of personal
computers such as Dell Computer can
benefit from the introduction of a
quality improvement program.
Answer:
A quality improvement program for Dell would
result in substantial savings in operating costs
and higher revenues. Operating costs
would be reduced since fewer funds would be spent
checking output
and correcting
defective products. Higher revenues would result
since existing customers would likely
increase their orders and the higher
quality output would attract additional
custo
mers. In addition, a
number of competitors will likely be
implementing quality programs. Dell must meet the
competition to
succeed.
Diff: 1
Terms: quality
Objective: 1
AACSB:
Reflective thinking
31) The
two basic aspects of quality are quality of design
and conformance quality. Define and give an
example of each.
Answer:
Quality of design measures how closely the
characteristics of products or services meet the
needs and wants of customers. For
example, customers of photocopying machines want
copiers that
combine copying, faxing,
scanning, and electronic printing. If the
photocopy machines fail to meet these
customer needs, sales will fall.
Conformance quality refers
to the performance of a product or service
according to design and product
specifications. For example, if a
photocopy machine constantly has paper jams or
breaks down, it fails to
satisfy
conformance quality.
Diff: 1
Terms: design quality, conformance
quality
Objective: 1
AACSB:
Reflective thinking
8
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Inc.
32) The Door Company
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
Answer:
g, j Prevention costs
d, l, k
Appraisal costs
a, b, c,
h, i, m
Internal failure costs
e, f, m
External failure costs
Diff: 3
Terms: prevention, appraisal, internal
failure, and external failure costs
Objective: 1
AACSB:
Reflective thinking
9
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Inc.
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 eac
h of
the categories.
Answer:
Prevention:
Hiring employees
with good references
Training of owners and employees
Good security
Good reservation system
Purchasing quality furniture
Appraisal:
Verifying accuracy of reservation and
registration procedures
Inspecting rooms, facilities, building
and grounds regularly
Observing activities of employees
Testing furniture and
fixtures
Taste testing food
Internal failure:
Recleaning rooms and facilities
Restocking rooms with
linens, glasses, etc.
Out-
of-stock supplies
Reinspection
Failure to bill on a timely basis
External failure:
Responding to complaints about rooms and food
Responding to complaints
about reservations
Emergency cleaning of rooms when not
ready on time
Customer
refunds because of unsatisfactory conditions
Opportunity cost of lost
revenue resulting from unhappy customers
Diff: 3
Terms: prevention,
appraisal, internal failure, and external failure
costs
Objective: 1
AACSB:
Ethical reasoning
10
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Inc.
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?
Answer: Most likely, the decline in
prevention costs as a percentage of sales over a
three-year period
would result in
increased internal and external failure costs as a
percentage of sales during this same
period. The reduced prevention
activities might result in more defective
products. Appraisal costs as a
percentage of sales might also rise as
management attempts to compensate for the higher
failure rates by
increasing inspection
and appraisal costs to prevent defects from
reaching the final customer.
Diff: 3
Terms: prevention,
appraisal, internal failure, and external failure
costs
Objective: 1
AACSB:
Reflective thinking
35) A quality
improvement program is very costly to implement
across a large corporation. Why do they
do it? Explain.
Answer:
(Answers may vary.)
A focus
on quality within an organization will have the
long run benefit of reducing costs and
increasing customer satisfaction.
The corporation must
consider four key cost of quality areas where
costs are most likely to occur: (1)
prevention costs - which arise when the
product does not meet the specifications, (2)
appraisal costs -
incurred by actions
which must be taken to detect which of the
individual units of products do not conform
with the specification(s), (3) internal
failure costs - incurred on defective products
before they are shipped
to customers,
and (4) external failure costs - incurred on
defective products after they are shipped to
customers.
Any
company which does not invest in quality
improvement by constantly reviewing, revising, and
implementing procedures to maintain
focus on the four key cost of quality areas will
be almost certain to
have lower
profits, revenues, and market share.
Diff: 3
Terms: quality,
prevention, appraisal, internal failure, and
external failure costs
Objective: 1
AACSB: Ethical reasoning
11
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Education, Inc.
Objective
19.2
1) An example of a
nonfinancial measure for customer satisfaction is:
A) delivery delay
B)
employee turnover
C) number of defects
on the production line
D) process
yield
Answer: A
Diff: 3
Terms: quality
Objective:
2
AACSB: Reflective thinking
2) An example of a
nonfinancial measure for customer satisfaction is:
A) Average manufacturing time for for
key products
B) Contribution margin
C) Percentage of products that fail
soon after delivery
D) Number of
employees trained on managing bottleneck
operations
Answer: C
Diff:
3
Terms: quality
Objective:
2
AACSB: Reflective thinking
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
Answer: A
Diff: 2
Terms: control chart
Objective: 2
AACSB:
Reflective thinking
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
Answer: B
Diff: 2
Terms: control chart
Objective: 2
AACSB:
Reflective thinking
12
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Inc.
5) When using a control
chart, a manager does NOT investigate the activity
when:
A) all observations
are outside the preset range
B) some
observations are outside the preset range
C) all observations are within the
range of preset standard deviations
D)
almost all observations are within the range of
two standard deviations
Answer: C
Diff: 2
Terms: control
chart
Objective: 2
AACSB:
Reflective thinking
6) A
tool which indicates how frequently each type of
defect occurs is a:
A) control chart
B) Pareto diagram
C) cause-
and-effect diagram
D) fishbone
diagrams
Answer: B
Diff: 2
Terms: Pareto diagram
Objective: 2
AACSB:
Reflective thinking
7) A tool which
identifies potential causes of failures or defects
is a:
A) control chart
B)
Pareto diagram
C) cause-and-effect
diagram
D) None of these answers is
correct.
Answer: C
Diff: 2
Terms: cause-and-effect diagram
Objective: 2
AACSB:
Reflective thinking
8) When
considering customer needs and wants, only
financial measures can be used, since they are
easily
measured.
Answer:
FALSE
Explanation: When considering
customer needs and wants, both financial as well
as nonfinancial
measures can be used.
Diff: 1
Terms: quality
Objective: 2
AACSB:
Ethical reasoning
9) An
example of a nonfinancial measure of customer
satisfaction would be the percentage of products
that fail soon after delivery.
Answer: TRUE
Diff: 2
Terms: Balanced Scorecard
Objective: 2
AACSB:
Communication
13
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2012 Pearson Education, Inc.
10) A measurement of market
share is considered a financial measure of
customer satisfaction.
Answer: FALSE
Explanation: A measurement of market
share is considered a nonfinancial measure of
customer
satisfaction.
Diff:
3
Terms: Balanced Scorecard, customer
satisfaction
Objective: 2
AACSB: Ethical reasoning
11) A control chart identifies
potential causes of failures or defects.
Answer: FALSE
Explanation:
A cause and effect chart identifies potential
causes of failures or defects.
Diff: 2
Terms: control
chart, cause-and-effect diagram
Objective: 2
AACSB:
Ethical reasoning
12) When using a
control chart, the observations outside the upper
and lower product specification limits
are ordinarily regarded as non random
and worth investigating.
Answer: FALSE
Explanation: When using a control
chart, the observations outside the upper and
lower control limits are
ordinarily
regarded as non random and worth investigating.
Diff: 2
Terms: control
chart, cause-and-effect diagram
Objective: 2
AACSB:
Analytical skills
13) A
cause-and-effect diagram is used to help identify
potential causes of defects.
Answer:
TRUE
Diff: 2
Terms: cause-
and-effect diagram
Objective: 2
AACSB: Analytical skills
14) A Pareto Diagram is usually in a
bar-chart format, and it shows how often a
particular problem has
occurred.
Answer: TRUE
Diff: 1
Terms: Pareto diagram
Objective: 2
AACSB:
Analytical skills
15) Six
Sigma emphasizes incremental rather than dramatic
or disruptive innovation.
Answer: TRUE
Diff: 2
Terms: six-sigma
Objective:
2
AACSB: Communication
14
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Education, Inc.
16) The
number of design and process changes made to
improve design quality or reduce costs of quality
is a type of nonfinancial quality
measure.
Answer: TRUE
Diff: 2
Terms: quality
Objective: 2
AACSB:
Analytical skills
17) Discuss the
methods used to identify quality problems.
Answer:
1.
A
control chart
is a graph of
a series of successive observations of a
particular step, procedure, or
operation taken at regular intervals of
time.
2.
A
Pareto diagram
indicates how
frequently each type of failure (defect) occurs.
3.
A
cause-and-effect
diagram
helps to identify potential causes of failures or
defects.
Diff: 2
Terms:
quality, control chart, Pareto diagram, cause-and-
effect diagram
Objective: 2
AACSB: Reflective thinking
18) 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.
Answer: Financial measures
of quality are quantifiable. The business can
calculate the costs of setting up
quality control systems, the costs of
noncompliance with quality in terms of the
internal and external costs
(rework,
warranty costs, etc.), and estimate the revenues
lost as a result of quality problems.
Nonfinancial measures of
quality are useful indicators of future long-run
performance. They are helpful in
revealing future needs and preferences
of customers and in indicating the specific areas
that need
improvement.
The use of one measure does not
preclude the use of the other. Financial measures
tend to be short term in
nature (what
is happening now). Nonfinancial measures tend to
be long term and are useful in terms of
estimating trends.
Financial performance measures are more
readily available than nonfinancia
l
measures, but they are no
more
important to the overall goals of the
organization. By considering nonfinancial
measures, the
organization can improve
operational control. Superior financial
performance usually follows from
superior nonfinancial performance.
Diff: 2
Terms: quality
Objective: 2
AACSB:
Reflective thinking
15
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Inc.
19) Design Products is
committed to its quality program. It works with
all areas of the company to
establish
sound quality programs within reasonable budget
guidelines. For 2011, it has budgeted
$$1,000,000 for prevention costs and
$$700,000 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 2011 budget
for a new method of testing
products.
If management decides to implement the new method,
$$2 per unit of appraisal costs will be
saved, up to a level of 200,000 tests.
No additional savings are expected past the
200,000 level. The new
method involves
$$90,000 in training costs and $$60,000 in yearly
testing supplies.
Traditionally, 3% of all completed
items have to be reworked. External failure costs
average $$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 2011?
b.
How much do
internal failure costs change, assuming 600,000
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)?
Answer:
a.
Current Budget
$$ 700,000
Additions: Training
$$90,000
Additions: Supplies
60,000
150,000
Savings: 200,000 ×
$$2
(400,000)
Adjusted budget
$$ 450,000
b.
Current budget $$100 ×
0.03
×
600,000 =
$$1,800,000
Savings rate
×
0.40
Net savings (reduction in
internal failure
costs)
$$
720,000
c.
Current budget $$120 ×
0.01
×
600,000 =
$$720,000
Savings rate
×
0.60
Net savings (reduction in
external failure
costs)
$$
432,000
Diff: 2
Terms: COQ; prevention, appraisal,
internal failure, and external failure costs
Objective: 2
AACSB:
Analytical skills
16
Copyright ? 2012 Pearson Education,
Inc.
20) The Custom Shirt
House 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, everyone
was blaming everyone else 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?
Answer: The causes may be
the lack of customer satisfaction with sales staff
(poor sales skills), delivery
problems
(not on time), accounting problems (poor billing
and collection procedures), or poor returns and
allowance policies.
The causes may be detected by comparing
nonfinancial measures of the company with those
found in the
industry. These might
include measures of: number of shipments incorrect
or not on time; number of
customer
complaints about certain areas (billing, shipping,
etc.); response time to customer complaints; or
a questionnaire about why former
customers quit buying from the company.
Diff: 2
Terms: quality
Objective: 2
AACSB:
Reflective thinking
21)
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?
Answer: The manager might
begin by identifying
the methods of
identifying quality problems. Statistical quality
control helps to distinguish between
random variation and nonrandom
variation. A control chart of observations usually
accompanies this.
Another method is the
use of a Pareto diagram. This indicates how
frequently each type of failure occurs.
Also, cause-and-effect diagrams help to
identify potential causes of failure. A fishbone
diagram is often
used here to identify
multiple causes of failure. Quality of design
could potentially be the biggest problem.
Diff: 2
Terms:
quality
Objective: 2
AACSB:
Communication
17
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2012 Pearson Education, Inc.
22) Three tools used to detect quality
problems include control charts, Pareto charts,
and cause and effect
diagrams. Briefly
explain each of these tools.
Answer:
A control chart is a graph of a series of
successive observations of a particular step,
procedure, or
operation taken at
regular intervals of time. These charts might
indicate when a process is out of control by
comparing observations to statistically
determined upper and lower level control limits.
A Pareto
diagram indicates how frequently each type of
failure (defect) occurs. Usually Pareto diagrams
use a bar-chart format.
A cause-and-effect diagram helps to
identify potential causes of failures or defects.
It is also known as a
fishbone diagram,
and groups the various causes into categories of
similar causes.
Diff: 2
Terms: control charts, Pareto charts,
cause and effect diagrams
Objective: 2
AACSB: Reflective thinking
Objective 19.3
1) Regarding the means by which
relevant costs and benefits are evaluated when
evaluating quality
improvement, the key
question is:
A) which alternative
solution will make the customer happiest
B) how total costs and total revenues
will change under each alternative solution
C) will the employees of the company be
able to implement the change
D) how
long will it take for the improvement program to
be fully functional
Answer: B
Diff: 2
Terms: relevant
costs, relevant revenues
Objective: 3
AACSB: Reflective thinking
Answer the following questions using
the information below:
Tri-
State Manufacturing expects to spend $$800,000 in
2012 in appraisal costs if it does not change its
incoming materials inspection method.
If it decides to implement a new receiving method,
it will save
$$80,000 in fixed appraisal
costs and variable costs of $$0.40 per unit of
finished product. The new method
involves $$120,000 in training costs and
an additional $$160,000 in annual equipment rental.
It takes two
units of material for each
finished product.
Internal
failure costs average $$160 per failed unit of
finished goods. During 2011, 5% of all completed
items had to be reworked. External
failure costs average $$400 per failed unit. The
company's average
external failures are
1% of units sold. The company carries no ending
inventories, because all jobs are on
a
per order basis and a just-in-time inventory
ordering method is used.
18
Copyright ? 2012 Pearson Education,
Inc.
2) What is the net
effect on appraisal costs for 2012, assuming the
new receiving method is implemented
and
that 800,000 material units are received?
A) $$120,000 increase
B)
$$120,000 decrease
C) $$400,000 decrease
D) $$400,000 increase
Answer: B
Diff: 2
Terms: appraisal costs, costs of
quality (COQ)
Objective: 3
AACSB: Analytical skills
3) How much will internal failure costs
change, assuming 800,000 units of materials are
received and that
the new receiving
method reduces the amount of UNACCEPTABLE product
units in the manufacturing
process by
10%?
A) $$40,000 increase
B) $$50,000 decrease
C)
$$160,000 decrease
D) $$320,000 decrease
Answer: C
Explanation:
C) Internal failure costs [(800,000/4)
×
0.05 ×
$$160
$$1,600,000
10% reduction
from new method
×
0.10
Savings
$$
160,000
Diff: 3
Terms:
internal failure costs, costs of quality (COQ)
Objective: 3
AACSB:
Analytical skills
19
Copyright ? 2012 Pearson Education,
Inc.
Answer the following
questions using the information below:
LaCrosse Products has a budget of
$$900,000 in 2012 for prevention costs. If it
decides to automate a
portion of its
prevention activities, it will save $$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 of prevention costs if
the procedures are automated in 2012? 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
Answer: B
Explanation:
B) New costs:
Training
$$40,000
New equipment
140,000
$$100,000
Savings
Variable costs
(80,000)
Net
increase in budget
$$ 60,000
Diff: 3
Terms: prevention costs, costs of
quality (COQ)
Objective: 3
AACSB: Analytical skills
5) How much will appraisal costs change
assuming the new prevention methods reduce
material failures
by 40% in the
appraisal phase?
A) $$140,000 decrease
B) $$60,000 increase
C)
$$50,000 decrease
D) $$22,500 decrease
Answer: C
Explanation: C)
Savings in appraisal costs is $$50,000
Diff: 2
Terms: appraisal
costs, costs of quality (COQ)
Objective: 3
AACSB:
Analytical skills
20
Copyright ? 2012 Pearson Education,
Inc.
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
Answer: A
Explanation:
A) Internal
failure rate (150,000 ×
0.03)
4,500
Cost per unit
×
$$15
Total
$$67,500
Savings rate
×
1/3
Savings
$$22,500
Diff: 2
Terms: internal failure costs, costs
of quality (COQ)
Objective: 3
AACSB: Analytical skills
7) How much do external failure costs
change if all changes are as anticipated with the
new prevention
procedures? Assume all
units produced are sold and there are no ending
inventories.
A) $$121,500
decrease
B) $$121,500 increase
C) $$243,000 decrease
D)
None of these answers is correct.
Answer: A
Explanation:
A) External failure costs (150,000
×
0.03 ×
$$54)=
$$243,000
Savings rate
×
0.50
Savings
$$121,500
Diff: 3
Terms: external
failure costs, costs of quality (COQ)
Objective: 3
AACSB:
Analytical skills
21
Copyright ? 2012 Pearson Education,
Inc.
8) Management has
offered to allow the prevention changes if all
changes take place as anticipated and the
amounts netted are less than the cost
of the equipment. What is the net impact of all
the changes created by
the preventive
changes?
A) $$140,000
B)
$$(22,500)
C) $$(134,000)
D)
$$(121,500)
Answer: C
Explanation:
C) Training
Costs
Equipment Costs
Savings
Prevention
Appraisal
Internal
failure costs
External failure
costs
Net Savings
Diff: 3
Terms: costs of
quality (COQ)
Objective: 3
AACSB: Analytical skills
$$40,000
100,000
140,000
$$ (80,000)
(50,000)
(22,500)
(121,500)
(274,000)
$$(
134,000)
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Copyright ? 2012
Pearson Education, Inc.
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