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:

Activities	Activity Cost
Correcting invoice errors	$11,680
Disposing of incoming materials with poor quality	8,760
Disposing of scrap	35,040
Expediting late production	29,200
Final inspection	23,360
Inspecting incoming materials	5,840
Inspecting work in process	32,120
Preventive machine maintenance	20,440
Producing product	110,960
Responding to customer quality complaints	14,600
Total	$292,000

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	$11,680		External failure	Non-value-added
Disposing of incoming materials with poor quality	8,760		Internal failure	Non-value-added
Disposing of scrap	35,040		Internal failure	Non-value-added
Expediting late production	29,200		Internal failure	Non-value-added
Final inspection	23,360		Appraisal	Value-added
Inspecting incoming materials	5,840		Appraisal	Value-added
Inspecting work in process	32,120		Appraisal	Value-added
Preventive machine maintenance	20,440		Prevention	Value-added
Producing product	110,960		Not costs of quality	Value-added
Responding to customer quality complaints	14,600		External failure	Non-value-added
Total	$292,000

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

	Percent of Total Department Cost =Individual Activity Cost / Total Activity Cost
	Quality Cost classification	Activity Cost	Percent of Total Department Cost
	Prevention	$20,440	7%
	Appraisal	$61,320	21%
	Internal Failure	$73,000	25%
	External Failure	$26,280	9%
	Not cost of quality	$110,960	38%
	Total	$292,000	100%
	Percent of Total Department Cost =Individual Activity Cost / Total Activity Cost
		Activity Cost	Percent of Total Department Cost
	Value-Added	$172,280	59%
	Non Value added	$119,720	41%
	Total	$292,000	100%