Question

1. Pareto Chart and A report summarizing the costs, percent of total, and percent of sales by appraisal, prevention, internal failure, and external failure cost of quality categories.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 The study of employee effort and other business records to determine the cost of activities.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	$19,080		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Disposing of incoming materials with poor quality	15,900		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Disposing of scrap	41,340		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Expediting late production	34,980		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Final inspection	22,260		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Inspecting incoming materials	6,360		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Inspecting work in process	34,980		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Preventive machine maintenance	22,260		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Producing product	104,940		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Responding to customer quality complaints	15,900		Appraisal External failure Internal failure Not a quality cost Prevention	Non-value-added Value-added
   Total	$318,000

   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
   • Line chart
   • Organization chart
   • Pie chart

   Which activity appears first, in order from left to right?
   

   • Disposing of scrap
   • Correcting invoice errors
   • Expediting late production
   • Inspecting work in process
   • 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 The cost associated with controlling quality (prevention and appraisal) and failing to control quality (internal and external failure)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 40% of its total costs as

   • non-value-added
   • value-added
   .
   • Appraisal
   • External failure
   • Internal failure
   • Prevention
   costs represent 29% of the total costs. This means there is
   • little
   • significant
   opportunity for cost savings.
   • Appraisal
   • External failure
   • Internal failure
   • Prevention
   costs represent 11% of the total department costs.

   Lead Time

   Sound Tek Inc. manufactures electronic stereo equipment. The manufacturing process includes printed circuit (PC) board assembly, final assembly, testing, and shipping. In the PC board assembly operation, a number of individuals are responsible for assembling electronic components into printed circuit boards. Each operator is responsible for soldering components according to a given set of instructions. Operators work on batches of 50 printed circuit boards. Each board requires 4 minutes of board assembly time. After each batch is completed, the operator moves the assembled boards to the final assembly area. This move takes 11 minutes to complete.

   The final assembly for each stereo unit requires 20 minutes and is also done in batches of 50 units. A batch of 50 stereos is moved into the test building, which is across the street. The move takes 20 minutes. Before conducting the test, the test equipment must be set up for the particular stereo model. The test setup requires 30 minutes. The units wait while the setup is performed. In the final test, the 50-unit batch is tested one at a time. Each test requires 10 minutes. The completed batch, after all testing, is sent to shipping for packaging and final shipment to customers. A complete batch of 50 units is sent from testing to shipping. The Shipping Department is located next to testing. Thus, there is no move time between these two operations. Packaging and labeling requires 9 minutes per unit.

   1. Determine the amount of value-added and non-value-added lead time and the value-added ratio in this process for an average stereo unit in a batch of 50 units. Categorize the non-value-added time into wait and move time. Round the percentage to one decimal place.

   Value-added lead time			min.
   Non-value-added lead time:
   	Wait time lead time	min.
   	Move time lead time	min.
   Total non-value-added lead time			min.
   Total lead time			min.
   Value-added ratio (as a percent)			%

   2. Move time in this process could best be reduced by:

   a. Doing nothing.

   b. Changing the layout from a process orientation to a product orientation.

   c. Increasing batch sizes.

   d. Eliminating the testing step.

   e. Hiring more workers.

Answer 1

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	19,080	External failure	Non-value-added
Disposing of incoming materials with poor quality	15,900	Internal failure	Non-value-added
Disposing of scrap	41,340	Internal failure	Non-value-added
Expediting late production	34,980	Internal failure	Non-value-added
Final inspection	22,260	Appraisal	Non-value-added
Inspecting incoming materials	6,360	Appraisal	Non-value-added
Inspecting work in process	34,980	Appraisal	Non-value-added
Preventive machine maintenance	22,260	Prevention	Value-added
Producing product	1,04,940	Not a quality cost	Value-added
Responding to customer quality complaints	15,900	External failure	Non-value-added
Total	$318,000

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?

• Disposing of scrap

Activity Cost 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Activity Cost

3. Use the activity cost information to determine the percentages of total department costs that are prevention, appraisal, internal failure, external failure, and not The cost associated with controlling quality (prevention and appraisal) and failing to control quality (internal and external failure)costs of quality. If required, round percentages to one decimal place.

		Percent of total department cost
Prevention	22260	0.07
Appraisal	63600	0.2
Internal failure	92220	0.29
External failure	34980	0.11
Not a quality cost	104940	0.33
total	318000

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 department cost
Value-added	127200	0.4
Non-value-added	190800	0.6
total	318000

5. The department has 40% of its total costs as costs

• value-added

.

Internal failure represent 29% of the total costs. This means there is ------------ opportunity for cost savings

• significant

.

costs represent 11% of the total department costs

• External failure

EXPLANATION

Costs of quality are the costs incurred because poor quality may or does exist

• Prevention costs are incurred to prevent poor quality in the products or services being produce

. Examples - quality training pro-grams, quality planning,

• Appraisal costs are incurred to determine whether products are con-forming to their requirements/specifications

Examples include inspecting and testing materials

• Internal failure costs are incurred when products do not conform to specifications and are   detected prior to being delivered to consumers.

Examples -   scrap, rework, retesting

• .External failure costs - incurred when products and services fail to conform to requirements after being delivered to customers.

Examples- returns and allowances, war-ranties, repairs,

Value added and are non value-added

1. not a cost of quality

• Production

2.Costs of quality

• Appraisal and failure activities and their associated costs are non value-added
• Prevention activities are value-added

	Activity	Activity Cost	Cost of Quality Classification	VA/NVA
	Correcting invoice errors	19,080	External failure	Non-value-added
assuming these are materials prodcued	Disposing of incoming materials with poor quality	15,900	Internal failure	Non-value-added
	Disposing of scrap	41,340	Internal failure	Non-value-added
	Expediting late production	34,980	Internal failure	Non-value-added
	Final inspection	22,260	Appraisal	Non-value-added
assuming these are materials prodcued	Inspecting incoming materials	6,360	Appraisal	Non-value-added
	Inspecting work in process	34,980	Appraisal	Non-value-added
	Preventive machine maintenance	22,260	Prevention	Value-added
	Producing product	1,04,940	Not a quality cost	Value-added
	Responding to customer quality complaints	15,900	External failure	Non-value-added
	Total	$318,000

Pareto

A bar chart that shows the totals of a particular attribute for a number of categories, ranked left to right from the largest to smallest totals

G37 16 Activity Cost Cost of Quality Classification 19 Disposing of scrap 1,340 Internal failure Non-value-added 20 Expediting late production 34,980 Internal failure Non-value-added Inspecting work in process 4,980 Appraisal Non-value-added Activity Cost Final inspection 22,260 Appraisal Non-value-added 45,000 40,000 Preventive machine maintenance 22,260 Prevention Correcting invoice errors 19,080 External failure Non-value-added 25 Disposing of incoming materials with poor quality 5,900 Internal failure Non-value-added 15,000 26 Responding to customer quality complaints 15,900 External failure Non-value-added Inspecting incoming materials 6,360 Appraisal Non-value-added ■ Activity Cost 30 32 35 36

3

G59 39 40 41 43 4 Activity Activity Cost Cost of Quality Classification 19080 45 Correcting invoice errors External failure 46 Disposing of incoming materials with poor quality 15900 Internal failure 41340 7 Disposing of scrap Internal failure 48 Expediting late production 34980 Internal failure 49 Final inspection 2260 Appraisal 50 Inspecting incoming materials 6360 Appraisal 51 Inspecting work in process 34980 Appraisal 52 Preventive machine maintenance 22260 Prevention 53 Producing product 104940 Not a quality cost 54 Responding to customer quality complaints External failure 15900 -SUM(E45:E54) 56 57 Percent of total department cost SUMIF(F45:F54,D58,E45:E54)-ES8/E$63 SUMIF(F45:F54,D59,E45:E54) E59/E$63 SUMIF(F45:F54,D60,E45:E54) E60/E$63 SUMIFIF45:F54,D61,E45:E54) -E61/ES63 58 Prevention 59 Appraisal 60 Internal failure 61 External failure SUMIF(F45:F54,D62,E45:E54)-E62/E$63 62 Not a quality cost 63 total -SUM E58 E62) 64

G70 42 43 44 Activity Activity Cost Cost of Quality Classification 45 Correcting invoice errors 19,080 External failure 46 quality 15,900 Internal failure 47 Disposing of scrap 41,340 Internal failure 48 Expediting late production 34,980 Internal failure 49 Final inspection 22,260 Appraisal 50 Inspecting incoming materials 6,360 Appraisal 51 Inspecting work in process 34,980 Appraisal 52 Preventive machine maintenance 22,260 Prevention 1,04,940 Not a quality cost 53 Producing product 54 Responding to customer quality complaints 15,900 External failure 3,18,000 56 57 Percent of total department cost 58 Prevention 22260 0.07 0.2 59 Appraisal 63600 60 Internal failure 92220 0.29 0.11 61 External failure 34980 62 Not a quality cost 104940 0.33 63 total 318000

4

Workbook Views Show/Hide Zoom Window G70 66 Activity Activity Cost VA/NVA 67 Correcting invoice errors 19080 Non-value-added 68 Disposing of incoming materials with poor quality 15900 Non-value-added 69 Disposing of scrap 41340 Non-value-added 70 Expediting late production 34980 Non-value-added 71 Final inspection 22260 Non-value-added 72 Inspecting incoming materials 6360 Non-value-added 73 Inspecting work in process 34980 Non-value-added 74 Preventive machine maintenance 22260 Value-added 75 Producing product 104940 Value-added 76 Responding to customer quality complaints 15900 Non-value-added -SUM(E67 E76) 78 79 Percent of total department cost SUMIF(F67:F76,D80,E67:E76) E80/ES63 80 Value-added -SUMIF(F67:F76,D81,E67:E76) E81/ES63 81 Non-value-added 82 total -SUM(E80:E84) 83 84 85 86 89

K79 66 Activity Activity Cost VA/NVA 67 Correcting invoice errors 19,080 Non-value-added 68 quality 15.900 Non-value-added 69 Disposing of scrap 41,340 Non-value-added 70 Expediting late production 34,980 Non-value-added 71 Final inspection 22,260 Non-value-added 72 Inspecting incoming materials 6,360 Non-value-added 73 Inspecting work in process 34,980 Non-value-added 74 Preventive machine maintenance 22,260 Value-added 75 Producing product 1,04,940 Value-added 76 Responding to customer quality complaints 15.900 Non-value-added 3,18,000 78 79 Percent of total department cost 0.4 80 Value-added 127200 81 Non-value-added 190800 0.6 82 total 318000 83 84 85 86 87

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