【正文】 an activitybased management perspective, further reductions are possible—at least in the failure categories. These are nonvalueadded costs and, in theory, can and should be reduced to zero. 4. Some external failure costs are not measured and reported in the accounting records. If the multiplier effect were four (for example), then in 2020, the external failure costs would be $225,000 ([4 ? $75,000] – $75,000) higher than reported. Given the reality of hidden costs, there is some validity to his point of view and it may be wise to invest additional funds for control activities. 323 14–5 Concluded 5. Gainsharing provides a strong incentive for managers to improve quality and reduce quality costs. Gainsharing is a good idea, provided the incentive system is carefully designed. The bonus must be truly based on quality improvements. Quality gains, stemming from quality cost reductions, must flow from true quality improvements. Thus, there should be operational quality measures that provide evidence of actual quality improvements. One possibility is to base bonuses only on reductions in failure and appraisal categories. This provides an incentive for managers to invest in preventive activities—actions that should reduce ―poor‖ quality costs. 14–6 1. Only four of the activities should be implemented: quality training, process control, supplier evaluation, and engineering redesign. Each of these four activities reduces failure costs more than it costs to implement the activity (thus, increasing the bonus pool). The cost reduction for failures is less than the amount spent for product inspection and prototype testing. Total quality costs: .............................Current control $ 160,000 ............................. Quality training 160,000 ........................... Process control 200,000 ..................... Supplier evaluation 120,000 .................Engineering redesign 40,000 ................................. Failure costs 184,000* $ 864,000 *$40,000 + ($720,000 – $656,000) + ($200,000 – $120,000) (adds back cost reductions of two activities not implemented). 324 14–6 Concluded 2. a. Total quality costs were reduced by $736,000 ($1,600,000 – $864,000). Quality training increased costs by $160,000 but reduced failure costs by $400,000, for a gain of $240,000. Process control increased costs by $200,000 but decreased failure costs by $320,000, for a gain of $120,000. Supplier evaluation increased costs by $120,000 but decreased failure costs by $456,000, for a gain of $336,000. Engineering redesign increased costs by $40,000 but decreased failure costs by $80,000, for a gain of $40,000. Total gain: $ 240,000 120,000 336,000 40,000 $ 736,000 b. Distribution percentage: Control costs:* $680,000/$864,000 = 79% (rounded) Failure costs: $184,000/$864,000 = 21% (rounded) *Total control costs less costs of activities not implemented: $1,000,000 – $80,000 – $240,000 = $680,000 Failure costs = $864,000 – $680,000 c. Bonus pool = ? $736,000 = $73,600 3. All of the same activities would be adopted plus prototype testing. Of the activities adopted, training, supplier evaluation, engineering redesign, and prototype testing are all prevention activities and so would not be counted in the cost reduction calculation. Failure costs would now be $104,000 (prototype addition reduces failure costs by an additional $80,000). The initial failure and appraisal costs are $1,600,000 ($1,440,000 + $160,000). The ending failure and appraisal costs are the sum of the current appraisal costs, ending failure costs, and the cost of adding process control: $160,000 + $104,000 + $200,000 = $464,000. Thus, the cost reductions counted for the bonus pool would be $1,136,000 ($1,600,000 – $464,000), and the bonus would be $113,600 ( ? $1,136,000). This approach has some merit as it encourages managers to invest in valueadded activities and avoid the temptation of reducing prevention costs prematurely. It is possible, however, that some prevention activities are not really worth doing, and this approach may lead to an overinvestment in this category. 325 14–7 1. Quality costs, 2020 ................... $ 110,000 Less quality costs, 2020.......... 81,000 $ 29,000 2. TruDelite Frozen Desserts, Inc. LongRange Performance Report For the Year Ended December 31, 2020 Actual Costs* LongRange 2020 Target Costs Variance Prevention costs: Training program ............. $ 6,000 $ 3,750 $ 2,250 U Supplier evaluation ......... 13,000 4,688 8,312 U ...............Total prevention $ 19,000 $ 8,438 $ 10,562 .....................................U Appraisal costs: Test labor ........................... $ 10,000 $ 4,687 $ 5,313 U Inspection labor ............... 30,000 2,813 27,187 U ..................Total appraisal $ 40,000 $ 7,500 $ 32,500 .....................................U Internal failure costs: Scrap ................................... $ 18,750 $ 2,812 $ 15,938 U Rework ............................... 12,500 0 12,500 U ........ Total internal failure $ 31,250 $ 2,812 $ 28,438 .....................................U External failure costs: Consumer plaints .... $ 6,250 $ 0 $ 6,250 U Lost sales, incorrect labeling 0 0 0 ....... Total external failure $ 6,250 $ 0 $ 6,250 .......................................U Total quality costs ....................... $ 96,500 $ 18,750 $ 77,750 U Percent of sales............................ % % % *Adjusted for sales of $750,000 [Uses the actual variable cost ratios of 2020 to pute the ―actual‖ unitlevel variable costs for this level of activity