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	$21,950		External failure	Non-value-added
Disposing of incoming materials with poor quality	17,560		Internal failure	Non-value-added
Disposing of scrap	57,070		Internal failure	Non-value-added
Expediting late production	48,290		Internal failure	Non-value-added
Final inspection	39,510		Appraisal	Value-added
Inspecting incoming materials	8,780		Appraisal	Value-added
Inspecting work in process	48,290		Appraisal	Value-added
Preventive machine maintenance	30,730		Prevention	Value-added
Producing product	144,870		Not a quality cost	Value-added
Responding to customer quality complaints	21,950		External failure	Non-value-added
Total	$439,000

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 38% of its total costs as non-value-added . Internal failure  costs represent 28% of the total costs. This means there is significant  opportunity for cost savings. External failure  costs represent 10% of the total department costs

Answer 1

1.

Activity	Activity Cost		Cost of Quality Classification	VA/NVA
Correcting invoice errors	$21,950		External failure	Non-value-added
Disposing of incoming materials with poor quality	$17,560		Internal failure	Non-value-added
Disposing of scrap	$57,070		Internal failure	Non-value-added
Expediting late production	$48,290		Internal failure	Non-value-added
Final inspection	$39,510		Appraisal	Value-added
Inspecting incoming materials	$8,780		Appraisal	Value-added
Inspecting work in process	$48,290		Appraisal	Value-added
Preventive machine maintenance	$30,730		Prevention	Value-added
Producing product	$144,870		Not a quality cost	Value-added
Responding to customer quality complaints	$21,950		External failure	Non-value-added
Total	$439,000

2.

Pareto B19 439,000 400,000 - 100 % > 84% 89% 949698910 А Activity Correcting invoice errors Activity Cost $21,950 300,000+ 1469 200,00013399 . 100,000 Disposing of incoming materials with Disposing of scrap Expediting late production Final inspection Inspecting incoming materials Inspecting work in process Preventive machine maintenance Producing product $17.560 $57,070 $48,290 $39,510 $8,780 $48,290 $30,730 $144,870 70% Responding to customer quality com $21,950 Producing product Disposing of scrap Expediting late production Inspecting work in process Final inspection Preventive machine maintenance Correcting invoice errors Responding to customer quality complaints Disposing of incoming materials with poor quality Inspecting incoming materials Activity Cost --Cumulative Total

Pareto chart combines the column chart with the line chart. The data values in a Pareto chart are represented by columns, which are arranged in descending order. The cumulative total of these values is shown by an upward curving line.

The bar chart is exactly the same as a column chart only x-axis and y-axis are switched. The bars can be plotted vertically or horizontally. A vertical bar chart is sometimes called a column chart.

Bars are arranged with longest bars on the left and the shortest to the right.

3.

Quality Cost	Activity Cost	Percent of Total
Classification		Department Cost
Prevention	$30,730	7%
Appraisal	$96,580	22%
Internal failure	$122,920	28%
External failure	$43,900	10%
Not a cost of quality	$144,870	33%
Total	$439,000	100%

4.  

	Activity Cost	Percent of Total
		Department Cost
Value added	$272,180	62%
Non-value added	$166,820	38%
Total	$439,000	100%

5. The above chart states that only 38% of total cost is Non-value added cost, remaining 62% is Value added so company is doing good with less Non-value added cost and high Value added cost.

As we can see in point 3 most of the cost are dedicated the internal or external failure, instead of that company should invest more in preventive and appraisal cost to reduce internal and external failure cost.

Internal cost represent 28% of total cost and external cost represent 10% of total cost.