Question

Long-Term Performance Report

Nabors Company had actual quality costs for the year ended June 30, 20x5, as given below.

Prevention costs:
Prototype inspection	$ 380,000
Vendor certification	760,000
Total prevention costs	$ 1,140,000
Appraisal costs:
Process acceptance	$ 395,000
Test labor	440,000
Total Appraisal costs	$ 835,000
Internal failure costs:
Retesting	$ 227,500
Rework	455,000
Total internal failure costs	$ 682,500
External failure costs:
Recalls	$ 232,000
Product liability	462,500
Total external failure costs	$ 694,500
Total quality costs	$3,352,000

At the zero-defect state, Nabors expects to spend $475,000 on quality engineering, $95,000 on vendor certification, and $80,000 on packaging inspection. Assume sales to be $3,000,000.

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-defect state.

Nabors Company
Long-Range Performance Report
For the Year Ended June 30, 20x5
	Actual Costs	Target Costs	Budget Variance	Favorable; or Unfavorable
Prevention costs:
(Packaging inspection, product liability, prototype inspection, recalls or retesting)	$	$	$
(Packaging inspection, product liability, recalls, vendor certification or retesting)
Total prevention costs	$	$	$
Appraisal costs:
(process acceptance, product liability, quality engineering, recalls or retesting)	$	$	$
(product liability, quality engineering, recalls, retesting, or test labor)
Total appraisal costs	$	$	$
Internal failure costs:
(packaging inspection, product liability, quality engineering, recalls, or retesting,	$		$
(packaging inspection, product liability, quality engineering, recalls, or rework)
Total internal failure costs	$		$
External failure costs:
(packaging inspection, quality engineering, recalls, retesting or rework)	$		$
(packaging inspection,product liability, quality engineering, retesting or rework)
Total external failure costs	$		$
Total quality costs	$	$	$
Percentage of sales	%	%	%

2. Why are quality costs still present for the zero-defect state?

(1. Inefficiencies mean that some defects will still occur. 2. Prevention costs are value-added costs that are necessary to maintain the quality gains. OR Some non-value -cost will still persist, even at the zero-defect state)

Answer 1

Nabors Company 1) Long-Range Performance For the Year Ended June 30, 20x5 Report Actual Costs Target Costs Budget Variance Prevention costs: NOTE $380,000 $475,000$95,000 Favorable $760,000$95,000$665,000 Unfavorable Budget variance is calculated by subtracting actual costs from Prototype inspection Vendor certification Total prevention costs $1,140,000$570,000$570,000 Unfavorable target costs but answers are presented as positive values. In Appraisal costs: other words, it is the difference between actual and target costs. $395,000 $80,000$315,000 Unfavorable $440,000 835,000S80,000 $755,000 Unfavorable f actual costs are less than target costs, it is favorable Process acceptance Test labor Total appraisal costs SO $440,000 Unfavorable If actual costs are higher than target costs, it is unfavorable; Internal failure costs: If actual costs are equal to target costs, there is no variance $227,500 $455,000 $682,500 O $227,500 Unfavorable SO$455,000 Unfavorable SO$682,500 Unfavorable Retesting Rework Total internal failure costs External failure costs: $232,000 $462,500 $694,500 SO$232,000 Unfavorable SO$462,500 Unfavorable SO$694,500 Unfavorable Recalls Product liability Total external failure costs Total quality costs Percentage of sales Option-(2): Prevention costs are value-added costs that are necessary to maintain the quality gains. $3,352,000$650,000 $2,702,000 Unfavorable 111.73% 21.67% Unfavorable--> Total quality costs / $3,000,000 (Sales) 90.07% 2)