Quality cost indices are often used to measure and analyze the cost of maintaining or improving the level of quality. Such indices are computed by dividing the total cost of quality over a given period by some measure of activity during that period for example, sales dollars). The following cost data are available for a company for the month of March. The company's quality cost index is calculated using total cost of quality divided by sales dollars.
Sales US $400,000
Direct materials cost 100,000
Direct labor cost 80,000
Testing and inspection cost 6,400
Scrap and rework cost 16,800
Quality planning cost 2,800
Cost of customer complaints and returns 4,000
The quality cost index for March is:
Answer(s): A
Explanation:
The total cost of quality equals the sum of prevention costs quality planning), appraisal casts testing and inspection), internal failure casts scrap and rework), and external failure casts customer complaints and returns), or U $30,000 $2,800 + $6,400 + $16,800 + $4,000). The quality cost index equals the total casts of quality divided by sales. Thus, the quality cast index for March is 7.5% U $80,000 U $400,000).