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CMA Final · Strategic Cost Management · Quality Cost Management

Sundaram Auto Parts reports the following annual quality costs: design review Rs. 1,20,000; supplier evaluation Rs. 80,000; final inspection Rs. 2,50,000; scrap Rs. 1,50,000; rework Rs. 1,00,000; warranty claims Rs. 3,00,000; lost sales from poor reputation Rs. 2,00,000 (opportunity cost, not in books). What is the total cost of nonconformance (failure costs) including the opportunity cost?

Nonconformance cost is Rs. 8,50,000. It adds internal failure (scrap and rework, Rs. 2,50,000) to external failure (warranty Rs. 3,00,000 and lost sales Rs. 2,00,000). Design review, supplier evaluation and final inspection are conformance costs and are excluded.

  1. ARs. 6,50,000
  2. BRs. 8,50,000Correct
  3. CRs. 10,00,000
  4. DRs. 7,00,000

Explanation

Failure costs = scrap 1,50,000 + rework 1,00,000 + warranty 3,00,000 + lost sales 2,00,000 = Rs. 8,50,000. Excluding the opportunity cost gives 6,50,000. Inspection and prevention items are conformance costs.

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