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	$15,960
Disposing of incoming materials with poor quality	13,300
Disposing of scrap	31,920
Expediting late production	26,600
Final inspection	26,600
Inspecting incoming materials	5,320
Inspecting work in process	29,260
Preventive machine maintenance	18,620
Producing product	85,120
Responding to customer quality complaints	13,300
Total	$266,000

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?
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	Value-Added/ Non-Value-Added Classification
Correcting invoice errors	$15,960		External failure	Non-value-added
Disposing of incoming materials with poor quality	13,300		Internal failure	Non-value-added
Disposing of scrap	31,920		Internal failure	Non-value-added
Expediting late production	26,600		Internal failure	Non-value-added
Final inspection	26,600		Appraisal	Value-added
Inspecting incoming materials	5,320		Appraisal	Value-added
Inspecting work in process	29,260		Appraisal	Value-added
Preventive machine maintenance	18,620		Prevention	Value-added
Producing product	85,120		Not costs of quality	Value-added
Responding to customer quality complaints	13,300		External failure	Non-value-added
Total	$266,000

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

Part 2

Any activity that increases benefits of a goods and services from customer’s perspective is a value added activity and that does not added any benefits is referred to as a non-value added activity.

Activity	Activity Cost	Cost of Quality Classification	VA/NVA
Correcting invoice errors	$15960	External Failure	Non-value added
Disposing of incoming materials with poor quality	13300	Internal Failure	Non-value added
Disposing of scrap	31920	Internal Failure	Non-value added
Expediting late production	26600	Internal Failure	Non-value added
Final inspection	26600	Appraisal	Value added
Inspecting incoming materials	5320	Appraisal	Value added
Inspecting work in process	29260	Appraisal	Value added
Preventive machine maintenance	18620	Prevention	Value added
Producing product	85120	Not a quality cost	Value added
Responding to customer quality complaints	13300	External Failure	Non-value added
Total	$266,000

Part 3

Quality Cost Classification	Activity Cost	Percent of Total Department Cost
Prevention	18620	7.0% (18620/266000)
Appraisal	50000 (26600+5320+29260)	23.0% (61180/266000)
Internal failure	65000 (13300+31920+26600)	27.0% (71820/266000)
External failure	22500 (15960+13300)	11.0% (29260/266000)
Not a cost of quality	85120	32.0% (85120/266000)
Total	266000	100%

Part 4

	Activity Cost	Percent of Total Department Cost
Value-added	164920 (26600+5320+29260+18620+85120)	62% (164920/266000)
Non-value-added	101080 (15960+13300+31920+26600+13300)	38% (101080/266000)
Total	266000	100%

Part 5

62% of its total costs as value-added .  

Internal failure costs represent 27%

External failure costs are 11%

only one activity classified as a(n) prevention cost