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. Cost of Quality Activity Activity Cost VA/NVA Classification Correcting invoice errors Disposing of incoming materials with poor quality Disposing of scrap Expediting late production $12,350 9,270 46,350 40,170 24,720 Final Inspection Inspecting incoming materials 6,180 Inspecting work in process 27,810 Preventive machine maintenance 21,630 Producing product Responding to customer quality complaints 101.970 18,540 3309,000 Total 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 Percent of Total Classification Activity Cost 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. Percent of Total Activity Cost Department Cost Value-added Non-value-added Total 5. The department has 41% of its total costs as opportunity for cost savings. costs represent 31% of the total costs. This means there is costs represent 10% of the total department costs.

Answer 1

Solution:

1) Classification of Costs:

Activity	Activity Cost	Cost of Quality Classification	VA/ NVA
Correcting invoice errors	12,360	External failure cost	Non-value-added
Disposing of incoming materials with poor quality	9,270	Internal failure cost	Non-value-added
Disposing of scrap	46,350	Internal failure cost	Non-value-added
Expediting late production	40,170	Internal failure cost	Non-value-added
Final inspection	24,720	Appraisal	Value-added
Inspecting incoming materials	6,180	Appraisal	Value-added
Inspecting work in process	27,810	Appraisal	Value-added
Preventive machine maintenance	21,630	Prevention	Value-added
Producing product	1,01,970	Not a quality cost	Value-added
Responding to customer quality complaints	18,540	External failure cost	Non-value-added
Total	3,09,000

3) Determination of Activity Cost in terms of Prevention, Appraisal, Internal failure cost, External failure cost and Not a quality cost:

Quality Cost Classification	Activity Cost	Percent of Total Department Cost
Prevention	21,630	7
Appraisal	58,710	19
Internal failure cost	95,790	31
External failure cost	30,900	10
Not a quality cost	1,01,970	33
Total	3,09,000	100

4) Determination of Activity Cost in terms of Value-added and Non-value-added:

	Activity Cost	Percent of Total Department Cost
Non-value-added	1,26,690	41
Value-added	1,82,310	59
Total	3,09,000	100

5) The Department has 41% of it's total cost as "Non value added", "Internal failure costs" represents 31% of the total costs. This means there is "21,630" opportunity for cost savings. "External failure cost" represents 10% of the total department costs.