Question

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	$17,760		Appraisal
Disposing of incoming materials with poor quality	13,320
Disposing of scrap	57,720
Expediting late production	48,840
Final inspection	39,960
Inspecting incoming materials	8,880
Inspecting work in process	48,840
Preventive machine maintenance	31,080
Producing product	155,400
Responding to customer quality complaints	22,200
Total	$444,000

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	$			%

Answer 1

Answer 1 : Classification of activities

Activity	Total Cost	Prevention	Appraisal	Internal failure	External failure	Not costs of quality
Correcting invoice errors	17,760					17,760
Disposing of incoming materials with poor quality	13,320			13,320
Disposing of scrap	57,720			57,720
Expediting late production	48,840			48,840
Final inspection	39,960		39,960
Inspecting incoming materials	8,880		8,880
Inspecting work in process	48,840		48,840
Preventive machine maintenance	31,080	31,080
Producing product	1,55,400					1,55,400
Responding to customer quality complaints	22,200				22,200
Total	4,44,000	31,080	97,680	1,19,880	22,200	1,73,160

Activity	Total Cost	VA / NVA
Correcting invoice errors	17,760	NVA
Disposing of incoming materials with poor quality	13,320	NVA
Disposing of scrap	57,720	NVA
Expediting late production	48,840	NVA
Final inspection	39,960	NVA
Inspecting incoming materials	8,880	NVA
Inspecting work in process	48,840	NVA
Preventive machine maintenance	31,080	NVA
Producing product	1,55,400	VA
Responding to customer quality complaints	22,200	NVA

Answer 2: A Pareto chart is a type of chart that contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line.

As can be seen from above chart, the activity of Product product appear first from left to right.

Answer 3

Quality Cost Classification	Activity Cost (as calculated in Answer 1) (A)		Percent of Total Dept cost (B) = (A)/Total cost
				Prevention	$	31080	7%
Appraisal	$	97680	22%
Internal failure	$	119880	27%
External failure	$	22200	5%
Not a cost of quality	$	173160	39%
Total	$	444000	100%

Answer 4

Activity	Subtotal Cost	Total Cost	% of Total Department cost
A. Value added - Producing product	1,55,400	1,55,400	35%
B. Non value added (Total cost of below activities)		2,88,600	65%
Correcting invoice errors	17,760
Disposing of incoming materials with poor quality	13,320
Disposing of scrap	57,720
Expediting late production	48,840
Final inspection	39,960
Inspecting incoming materials	8,880
Inspecting work in process	48,840
Preventive machine maintenance	31,080
Responding to customer quality complaints	22,200
Total cost		4,44,000	100%