Question

The following represents the financial information for Domingo Corporation for two months.

	March		April
Sales revenue	$	480,000	$	430,000
Costs
Process inspection	$	1,650	$	1,850
Scrap		1,940		1,850
Quality training		20,300		12,300
Warranty repairs		4,400		5,000
Product testing equipment		6,600		7,300
Customer complaints		2,700		3,400
Rework		17,000		17,000
Preventive maintenance		14,700		8,800
Materials inspection		5,800		4,400
Field testing		9,400		14,300

Required:

a. Classify these items into Prevention, Appraisal, Internal failure, or External failure costs.

b. Calculate the ratio of the prevention, appraisal, internal failure, and external failure costs to sales for March and April.

Answer 1

Answer :

(a) classification of items

Activity	category
Process inspection	prevention cost
Scrap	internal failure cost
Quality training	prevention cost
Warranty repairs	external failure cost
Product testing equipment	appraisal cost
Customer complaints	external failure cost
Rework	internal failure cost
Preventive maintenance	prevention cost
Material inspection	prevention cost
Field testing	appraisal cost

(b) calculation of ratios of the prevention , appraisal, internal failure and external failure Costs to sales :

i) prevention costs

	March	April
Process inspection	1,650	1,850
Quality Training	20,300	12,300
Preventive maintenance	14,700	8,800
Material inspection	5,800	4,400
Total preventive costs	42,450	27,350
Cost to sales ratio (cost /sales )	8.84%	6.36%

ii) Appraisal costs

	March	April
Product testing equipment	6,600	7,300
Field testing	9,400	14,300
Total appraisal costs	16,000	21,600
Cost to sales ratio	3.34%	5.03%

iii) internal failure costs

	March	april
Scrap	1,940	1,850
Rework	17,000	17,000
Total internal failure costs	18,940	18,850
Cost to sales ratio	3.95%	4.38%

iv) External failure costs

	March	april
Warranty repairs	4,400	5,000
Customer complaints	2,700	3,400
Total external costs	7,100	8,400
Cost to sales ratio	1.48%	1.95%

Note : Given sales for March and April are 4,80,000 & 4,30,000