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Chapter 19: Q.38PGA-1 (page 1079)

Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella鈥檚 senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Activity Predicted Predetermined

Reduction in Overhead Allocation

Activity Units Rate per Unit

Inspection of incoming raw materials 390 $ 44

Inspection of finished goods 390 19

Number of defective units discovered in-house 1,200 50

Number of defective units discovered by customers 325 72

Lost profits due to dissatisfied customers 75 102

Requirements

1. Calculate the predicted quality cost savings from the design engineering work.

Short Answer

Expert verified

Answer

Total predicted quality cost savings amount to $115,620.

Step by step solution

01

Quality cost savings

Quality cost-saving is the reduction in the cost by improving the quality of products or services. Quality is improved by implementing quality improvement programs. Thus the cost incurred on quality improvement programs replaces the cost of lower quality products and the overall cost gets reduced.

02

Calculation of predicted quality cost savings

Activity

Predicted reduction in activity units

Allocation rate per unit

Predicted quality cost savings

Inspection of incoming raw material

390

44

$17,160

Inspection of finished goods

390

19

$7,410

Number of defective units discovered in house

1200

50

$60,000

Number of defective units discovered by customers

325

72

$23,400

Lost profits due to dissatisfied customers

75

102

$7,650

Total predicted quality cost savings

$115,620

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Most popular questions from this chapter

Question:Refer to Exercise E19-26. Western desires a 20% target net profit after covering all costs. Considering the total costs assigned to the Halbert engagement in Exercise E19-26, what would Western have to charge the customer to achieve that net profit? Roundto two decimal places.

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018:

Activity Allocation Base Predetermined Overhead

Allocation Rate

Materials handling Number of parts $ 4.00 per part

Machine setup Number of setups 400.00 per setup

Insertion of parts Number of parts 26.00 per part

Finishing Number of finishing hours 90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

Standard Deluxe

Parts per rim 4.0 7.0

Setups per 500 rims 18.0 18.0

Finishing hours per rim 1.0 5.5

Total direct hours per rim 5.0 6.0

The company expects to produce 500 units of each model during the year.

Requirements

2. Prior to 2018, Eason used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.

List and define the four types of quality costs.

Explain how the work cell manufacturing layout increases productivity.

The Oakman Company manufactures products in two departments: Mixing and Packaging. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are $810,000, and estimated direct labor hours are 360,000. In October, the company incurred 20,000 direct labor hours.

Requirements

2. Determine the amount of overhead allocated in October.
See all solutions

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