Page 825 - Accounting Principles (A Business Perspective)

20. Using accounting for quality and cost management

Revenue $180,000 $200,000 $380,000
Direct materials 25,000 25,000 50,000
Direct labor 90,000 60,000 150,000
Indirect costs:
Administration ------- ---------- 25,000
Production setup ------- ---------- 50,000
Quality control ------- ---------- 25,000
Marketing ------- ---------- 20,000
Operating profit $60,000
Filmworks Photography currently uses labor costs to allocate all overhead, but management is considering
implementing an activity-based costing system. After interviewing the sales and production staff, management
decides to allocate administrative costs on the basis of direct labor costs and to use the following bases to allocate
the remaining overhead:
Cost driver Units
Activity Cost driver Student Family
Production setup Photo sessions 150 250
Quality control Customer inspections 300 200
Marketing Advertisements 60 40
a. Complete the income statement using these activity bases.
b. Write a report describing how management might use activity-based costing to reduce costs.
c. Restate the income statement for Filmworks Photography using direct labor costs as the only overhead

allocation base.
d. Write a report to management stating why product line profits differ using activity-based costing compared to
the traditional approach. Indicate whether the activity-based costing method provides more accurate information
and why (if you believe it does provide more accurate information). Indicate in your report how the use of labor-
based overhead allocation could result in Filmworks Photography management making suboptimal decisions.
Alternate problems

Alternate problem A These cost items are from Rocket Company's accounts for a typical month:
Design work to improve the way products are $48,000
made
Warranty work to satisfy customer complaints 24,000
Employee training 36,000
Incoming materials inspection 40,000
Scrap 36,000
Cost of returned goods 48,000
Inspection at the end of the production process 60,000
a. Classify these items into prevention costs, appraisal costs, internal failure costs, and external failure costs.
b. Suppose Rocket Company could spend an additional USD 40,000 per month on incoming materials
inspection, and thereby reduce internal failure and external failure costs by 20 per cent each per month. Would this

be a wise thing for Rocket Company to do?
c. Give two examples of additional nonfinancial quality measures that Rocket Company could use to help
improve quality. (Hint: See Exhibit 159.)
Alternate problem B You have been hired by Student Health Services to help assess the quality of their
services. You have been looking over the following information for the month of May:
Number of patient complaints 120
Minutes the average patient waits 3.8
Cases of missed diagnosis 4
What additional information would you like to have to assess the quality of the organization's performance?

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