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	$14,680
Disposing of incoming materials with poor quality	11,010
Disposing of scrap	44,040
Expediting late production	36,700
Final inspection	25,690
Inspecting incoming materials	7,340
Inspecting work in process	40,370
Preventive machine maintenance	25,690
Producing product	143,130
Responding to customer quality complaints	18,350
Total	$367,000

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?

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

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 34% of its total costs as . costs represent 25% of the total costs. This means there is opportunity for cost savings. costs represent 9% of the total department costs.

Answer 1

Activity	Description	cost	COQ classification	VA / NVA
A	Correcting invoice errors	14680	Not a COQ	NVA
B	Disposing of incoming materials with poor quality	11010	Internal failure	NVA
C	Disposing of scrap	44040	Internal failure	NVA
D	expediting late production	36700	Not a COQ	VA
E	Final inspection	25690	Appraisal cost	VA
F	Inspecting incoming material	7340	Appraisal cost	VA
G	Inspecting work in progress	40370	Appraisal cost	VA
H	Preventive machine maintenance	25690	Preventive cost	VA
I	Producing products	143130	Not a COQ	VA
J	Responding to customer quality complaints.	18350	External failure	VA

2. Pareto chart

3.

Classification	Activity	Cost	%
Not a COQ	A,D,I	194510	53
Internal failure	B,C	55050	15
External Failure	J	18350	5
Appraisal cost	E,F,G	73400	20
Preventive cost	H	25690	7

4.

Classification	Activity	Cost	%
VA	D,E,F,G,H,I,J	297270	81
NVA	A,B,C	69730	19