Tag (SQ): Material Losses

Akwasi Company makes and sells a single product from its base in Kumasi. The existing product specifications are as follows:

| Material X | 8 square metres at GH₵4 per square metre | | Machine time | 0.6 running hours | | Other machine costs | GH₵40/hour | | Selling price | GH₵100 |

Akwasi Company needs to fulfil orders for 5,000 units per period. There will be no change in inventory level during the period.
The following information is available about performance before the introduction of a TQM programme:
(1) 5% of incoming material from suppliers is scrapped due to poor receipt and storage.
(2) 4% of material input to the machine process is wasted in process.
(3) Inspection and storage of material cost GH₵0.10 per metre.
(4) Inspection during the cycle costs GH₵25,000 per period.
(5) Production is increased to allow for the downgrading of 12.5% of units at the final inspection phase. Downgraded units are sold as ‘second quality’ units at a discount of 30% of the final selling price.
(6) Production is increased to allow for returns from customers. These are replaced free of charge. Returns are due to specification failure and account for 5% of units initially delivered to customers. Replacement units incur a delivery cost of GH₵8 per unit. 80% of the returns from customers are rectified using 0.2 hours of machine running time and are resold as ‘third quality’ products at a discount of 50% on the standard selling price. The remaining returned units are sold as scrap for GH₵5 per unit.
(7) Product liability claims are estimated at 3% of sales revenue from standard product sales.
(8) Machine idle time is 20% of gross machine hours used.
(9) Sundry costs of administration, selling and distribution total GH₵60,000 per period.
(10) Akwasi Company is aware of these excess costs and currently spends GH₵20,000 per period to prevent them from happening.

Akwasi Company is planning a quality management programme that will increase its cost prevention expenditure from GH₵20,000 to GH₵60,000 per period. The estimates of performance levels after the TQM programme are as follows:
(1) A reduction in stores losses of material to 3%.
(2) A reduction in the downgrading of products inspected to 7.5%.
(3) A reduction in material losses in the process to 2.5% of input to the machine process.
(4) A reduction in returns of products from customers to 2.5% delivered.
(5) A reduction in machine idle time to 12.5% of gross hours used.
(6) A reduction in product liability claims to 1% of sales revenue.
(7) A reduction in inspection checks by 40% of the existing figure.
(8) A reduction in sundry administration, selling and distribution costs by 10% of the existing figure.
(9) A reduction in machine running time per unit of product to 0.5 hours.

Required:
(a) Prepare summaries showing total units, purchases of material and gross machine hours:
(i) before implementation of the TQM programme, and
(ii) after implementation of the TQM programme.
(b) Prepare statements of profit or loss for the period both before and after implementation of the TQM programme.