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
3. What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?
Different approaches to the COQ model are – PQC, TCOQ, and QFD models as they remove the difficulty of complexities, and are simple to understand and measure quality.
The difficulties in implementing the COQ approach are as follows –
1) Measuring the quality cost is the major difficulty as every cost cannot be measured like profit loss due to unhappiness of customers.
2) Another difficulty in implementing this approach is the lack of knowledge of using this approach efficiently.
3) Another difficulty arises due to the lack of needed tools to collect, organize, filter, and report quality costs.
Alternative approaches to COQ are as follows –
1) Poor Quality cost – This is the improved model and ignores the prevention and appraisal costs as they are problematic to measure.
2) Total cost of quality – TCOQ model differs from COQ in the sense that TCOQ does not include maintenance and quality training costs as in the COQ model. Thus it is not a preferred model as that of COQ.
3) Qualified function development – QFD was developed to understand the customer requirements and maximize the quality positively by creating a comprehensive quality system.
Turbo Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process. Company managers have identified three supporting manufacturing activities: inspection, machine setup, and machine maintenance. The budgeted activity costs for 2018 and their allocation bases are as follows:
Activity Total Budgeted Cost Allocation Base
Inspections $ 5,700 Number of inspections
Machine setup 22,000 Number of setups
Machine maintenance 6,000 Finishing of machine hours
Total $ 33,700
Turbo Champs expects to produce 20 custom-built motorcycles for the year. The motorcycles are expected to require 100 inspections, 40 setups, and 100 machine hours.
1. Compute the predetermined overhead allocation rate for each activity.
Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activitybasedn costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:
Sales price $ 800.00 $ 940.00
Direct materials 31.00 48.00
Direct labor 45.00 52.00
Because of limited machine hour capacity, Eason can produce either 2,000 standard rims or 2,000 deluxe rims.
3. Which course of action will yield more income for Eason?
Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling $ 95,000 Number of kilos 19,000 kilos
Packaging 200,000 Number of machine hours 5,000 hours
Quality assurance 112,500 Number of samples 1,875 samples
Total indirect costs $ 407,500
Actual production information includes the following:
Commercial Containers Travel Packs
Units produced 2,400 containers 50,000 packs
Weight in kilos 9,600 5,000
Machine hours 1,680 500
Number of samples 240 750
3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)
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