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:

Activities	Activity Cost
Correcting invoice errors	$12,000
Disposing of incoming materials with poor quality	9,600
Disposing of scrap	33,600
Expediting late production	28,800
Final inspection	21,600
Inspecting incoming materials	4,800
Inspecting work in process	24,000
Preventive machine maintenance	16,800
Producing product	74,400
Responding to customer quality complaints	14,400
Total	$240,000

The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap.

Required:

1. 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?

Which activity appears first, in order from left to right?

2. 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	Value-Added/ Non-Value-Added Classification
Correcting invoice errors	$12,000
Disposing of incoming materials with poor quality	9,600
Disposing of scrap	33,600
Expediting late production	28,800
Final inspection	21,600
Inspecting incoming materials	4,800
Inspecting work in process	24,000
Preventive machine maintenance	16,800
Producing product	74,400
Responding to customer quality complaints	14,400
Total	$240,000

3. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality (producing product).

Quality Cost Classification	Activity Cost			Percent of Total Department Cost
Prevention	$			%
Appraisal				%
Internal failure				%
External failure				%
Not costs of quality				%
Total	$			%

4. Determine the percentages of total department costs that are value-added and non-value-added.

	Activity Cost			Percent of Total Department Cost
Value-added	$			%
Non-value-added				%
Total	$			%

5. The department has ___% of its total costs as non-value-added. Internal failure costs represent ___% of the total costs. This means there is significant opportunity for cost savings. External failure costs represent ___% of the total department costs.

Answer 1

1. 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
2. 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	12,000	External failure	Non-value-added
Disposing of incoming materials with poor quality	9,600	Internal failure	Non-value-added
Disposing of scrap	33,600	Internal failure	Non-value-added
Expediting late production	28,800	Internal failure	Non-value-added
Final inspection	21,600	Appraisal	Value-added
Inspecting incoming materials	4,800	Appraisal	Value-added
Inspecting work in process	24,000	Appraisal	Value-added
Preventive machine maintenance	16,800	Prevention	Value-added
Producing product	74,400	Not a quality cost	Value-added
Responding to customer quality complaints	14,400	External failure	Non-value-added
Total	240,000
3. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality (producing product).
Quality Cost Classification	Activity Cost	Percent of Total Department Cost
Prevention	$                          16,800.00	7.00%
Appraisal	$                          50,400.00	21.00%
Internal failure	$                          72,000.00	30.00%
External failure	$                          26,400.00	11.00%
Not a cost of quality	$                          74,400.00	31.00%
Total	$                        240,000.00	100.00%
Percentages of total activity cost that are value- and non-value-adde
	Activity Cost	Percent of Total Department Cost
Value Added	141,600	59.00%
Non Value Added	$98,400	41.00%
	$240,000	100.00%
Total	$
5. The department has 41% of its total costs as non-value-added. Internal failure costs represent 30% of the total costs. This means there is significant opportunity for cost savings. External failure costs represent 11% of the total department costs.