Question

Pareto Chart and Cost of Quality Report for a Manufacturing Company The president of Mission Inc. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The result of the activity analysis is summarized as follows: Required: 1. Classify the activities into prevention, appraisal, internal failure, external failure, and not costs of quality (producing product). Classify the activities into value-added and non-value added activities. Activity Activity Cost Cost of Quality Classification VA/NVA Correcting invoice errors $22,600 External failure Non-value-added Disposing of incoming materials with poor quality 18,080 Internal failure Non-value-added Disposing of scrap 54,240 Internal failure Non-value-added Expediting late production 45,200 Internal failure Non-value-added Final inspection 40,680 Appraisal Value-added Inspecting incoming materials 9,040 Appraisal Value-added Inspecting work in process 40,680 Appraisal Value-added Preventive machine maintenance 31,640 Prevention Value-added Producing product 162,720 Not a quality cost Value-added Responding to customer quality complaints 27,120 External failure Non-value-added Total $452,000 2. On paper or in a spreadsheet program, prepare a Pareto chart for each of the activities listed above. Answer the following: What type of chart is a Pareto chart? Bar chart Which activity appears first, in order from left to right? Producing product 3. Use the activity cost information to determine the percentages of total department costs that are prevention, appraisal, internal failure, external failure, and not costs of quality. If required, round percentages to one decimal place. Quality Cost Classification Activity Cost Percent of Total Department Cost Prevention $ % Appraisal % Internal failure % External failure % Not a cost of quality % Total $ % 4. Determine the percentages of total department costs that are value-added and non-value-added. If required, round percentages to one decimal place. Activity Cost Percent of Total Department Cost Value-added $ % Non-value-added % Total $ % 5. The department has 37% of its total costs as non-value-added . Internal failure costs represent 26% of the total costs. This means there is significant opportunity for cost savings. External failure costs represent 11% of the total department costs.

Answer 1

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Value-Added/

Activity

Cost of Quality Classification

Non-Value-Added Classification

Quality Activities

Cost

Correcting invoice errors

$      22,600

External failure

Non-value-added

Disposing of incoming materials with poor quality

18,080

Internal failure

Non-value-added

Disposing of scrap

54,240

Internal failure

Non-value-added

Expediting late production

45,200

Internal failure

Non-value-added

Final inspecting

40,680

Appraisal

Value-added

Inspecting incoming materials

9,040

Appraisal

Value-added

Inspecting work in process

40,680

Appraisal

Value-added

Preventive machine maintenance

31,640

Prevention

Value-added

Producing product

162,720

Not a quality cost

Value-added

Responding to customer quality complaints

27,120

External failure

Non-value-added

Total

$    452,000

2.

MISSION INC.

Cost of Quality Report

Cost Summary

Percent of

Quality Cost

Activity

Total

Classification

Cost

Quality Cost

Prevention

$      31,640

7.0%

Appraisal

90,400

20.0%

Internal failure

117,520

26.0%

External failure

49,720

11.0%

Not a cost of quality

162,720

36.0%

Total

$    452,000

100.0%

3.

MISSION INC.

Value-Added/Non-Value-Added Activity Analysis

Category

Amount

Percent

Value-added

$    284,760

63%

Non-value-added

167,240

37%

Total

$    452,000

100%