Question

Nabors Company had actual quality costs for the year ended June 30,20x5, as given below. Prevention costs: $ 350,000 Prototype inspection Vendor certification 700,000 $ 1,050.000 Total prevention costs Appraisal costs: Process acceptance $365,000 Test labor 410,000 Total Appraisal costs $ 775.000 Internal failure costs: Retesting $ 212,500 Rework 425,000 Total internal failure costs $ 637.500 External failure costs: Recalls $ 227.250 Product liability 515,750 Total external failure costs $ 743,000 Total quality costs $3,205,500 At the zero-defect state, Nabors expects to spend $437,500 on quality engineering, 587,500 on vendor certification, and $40,000 on packaging inspection. Assume sales to be $2,400,000. Required: 1. Prepare a long-range performance report for 20x5. Enter all answers as positive amounts. If the budget variance amount is unfavorable select "Unfavorable" in the last column of the table. Select "Favorable" if it is favorable. Round percentage answers to two decimal places, if rounding is required. For example, 5.789% would be entered as "5.79'. Enter "0" as the target cost amount if there would be no cost at the zero- delect stale.

Answer 1

Solution-

1 Nabors Company Long-Range Performance Report For the year ended June 30, 20x5 Actual Costs Target Costs Budget Variance Favorable; or Unavorable $ $ 350,000 $ 437,500 $ 700,000 $ 87,500 $ 1,050,000 $ 525,000 $ (87,500) Favorable 612,500 Unfavorable 525,000 Unfavorable $ 365,000 $ 40,000 $ 410,000 $ 775,000 $ 40,000 $ 325,000 Unfavorable 410,000 Unfavorable 735,000 Unfavorable $ Prevention costs: Prototype inspection Vendor Certification Total Prevention costs Appraisal costs: Process acceptance Test Labor Total Appraisal costs Internal Failure costs: Retesting Rework Total Internal Failure costs External Failure costs: Recalls Product liability Total External Failure costs Total quality costs Percentage of sales [-Total Quality Costs/$2400000(sales)] $ $ 212,500 425,000 637,500 $ S $ $ 212,500 Unfavorable 425,000 Unfavorable 637,500 Unfavorable $ $ $ 227,250 $ 515,750 $ 743,000 $ $ 3,205,500 $ 565,000 $ 133.56% 23.54% 227,250 Unfavorable 515,750 Unfavorable 743,000 Unfavorable 2,640,500 Unfavorable 110.02% Unfavorable

2	Why are quality costs still present for the zero-defect state?
	Prevention costs are value-added costs that are necessary to maintain the quality gains.