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Horngren'S Financial And Managerial Accounting
Found in: Page 1079

Short Answer

Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s 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

2. Stella spent $103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?

Answer

The net benefit of design engineering amounts to $12,620.

See the step by step solution

Step by Step Solution

Step 1: Quality improvement activity or programs

Quality improvement activities or programs are the programs that intend to improve quality and reduce costs. There are four types of programs based on quality cost-

1) Prevention cost

2) Appraisal cost

3) Internal failure costs

4) External failure cost

Step 2: Calculation of net benefit of preventive quality activity

Total predicted quality cost savings: $115,620

Amount spent on design engineering: $103,000

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