Page 823 - Accounting Principles (A Business Perspective)

20. Using accounting for quality and cost management

c. Would you advise Landscape, Inc., to drop either the residential or commercial service based on your
analysis? Explain.

Problems
Problem A Here are cost items from Huskie Company's accounts for a typical month:
Inspection at the end of the production process $80,000
Cost of returned goods 36,000
Design work to improve the way products are 48,000
made
Repairs to satisfy customer complaints 20,000
Employee training 24,000
Incoming materials inspection 20,000
Scrap 36,000
a. Classify these items into prevention costs, appraisal costs, internal failure costs, and external failure costs.
b. Suppose Huskie Company could spend an additional USD 40,000 per month on design work to improve the
way products are made, and thereby reduce internal failure and external failure costs by 30 per cent each per
month. (Appraisal costs would not be affected.) Would this be a wise thing for Huskie Company to do?
c. Give two examples of additional nonfinancial quality measures that Huskie Company could use to help
improve quality. (Hint: See Exhibit 159.)
Problem B You have been hired by Bucks 'R' Us Bank to help assess the quality of their services. This
information is for the month of March:
Customer complaints 60
Average customer waiting time 22 minutes
Number of lost files 2
Lawsuits filed against the bank 1
What additional information would you like to have to assess the quality of the bank's performance?
Problem C Heatseek Precision Instruments produces sensitive heat measurement meters. The company has a
large backlog of orders and no beginning inventories because all units in production last year were sold by the end
of the year. At the start of this year, an order was received for 2,000 meters.
The company purchased and used USD 105,000 of materials in production for this order. Direct labor costs of

USD 320,000 were incurred, and overhead costs of USD 520,000 were applied. Goods representing 10 per cent of
these costs were still in finished goods inventory at the end of the period.
a. Use T-accounts to show the flow of costs under a traditional costing system.
b. Prepare journal entries for these transactions using backflush costing.
c. Use T-accounts to show the flow of costs using a JIT system with backflush costing.
Problem D C & W Corporation manufactures travel clocks and watches. Overhead costs are currently allocated
using direct labor-hours, but the controller has recommended using an activity-based costing system based on the

following data:
Activity Level
Activity Cost driver Cost Travel Watches
clocks
Production setup Setups $100,000 20 30
Material handling and Parts 30,000 24 36
requisition
Packaging and shipping Units shipped 60,000 80,000 120,000
Total overhead $190,000
a. Compute the amount of total overhead allocated to each of the products under activity-based costing.

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