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	$29,640
Disposing of incoming materials with poor quality	24,700
Disposing of scrap	59,280
Expediting late production	49,400
Final inspection	49,400
Inspecting incoming materials	9,880
Inspecting work in process	44,460
Preventive machine maintenance	34,580
Producing product	167,960
Responding to customer quality complaints	24,700
Total	$494,000

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?

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 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  .   costs represent 27% of the total costs. This means there is   opportunity for cost savings.   costs represent 11% of the total department costs.

Answer 1

Answer 1. Classification of Activities into Cost of Quality. Further Classification as Value added activity and Non Value added Activity.

Activity	Activity Cost	Cost of Quality Classification	Value Added Activity/ Non Value Added Activity
Correcting invoice errors	$29,640	External Failure Cost	Non Value Added Activity
Disposing of incoming materials with poor quality	24,700	Internal Failure Cost	Non Value Added Activity
Disposing of scrap	59,280	Internal Failure Cost	Non Value Added Activity
Expediting late production	49,400	Internal Failure Cost	Non Value Added Activity
Final inspection	49,400	Appraisal Cost	Value Added Activity
Inspecting incoming materials	9,880	Appraisal Cost	Value Added Activity
Inspecting work in process	44,460	Appraisal Cost	Value Added Activity
Preventive machine maintenance	34,580	Prevention Cost	Value Added Activity
Producing product	167,960	Not a cost of Quality	Value Added Activity
Responding to customer quality complaints	24,700	External Failure Cost	Non Value Added Activity
Total	$494,000

Answer 2. :- Pareto Analysis

Activity	Activity Cost	(%) Of Total	Cumulative % of Total
Producing product	$167,960	34.00%	34.00%
Disposing of scrap	$59,280	12.00%	46.00%
Expediting late production	$49,400	10.00%	56.00%
Final inspection	$49,400	10.00%	66.00%
Inspecting work in process	$44,460	9.00%	75.00%
Preventive machine maintenance	$34,580	7.00%	82.00%
Correcting invoice errors	$29,640	6.00%	88.00%
Disposing of incoming materials with poor quality	$24,700	5.00%	93.00%
Responding to customer quality complaints	$24,700	5.00%	98.00%
Inspecting incoming materials	$9,880	2.00%	100.00%
Total	$494,000	100.00%

Pareto Analysis Chart

Activity Cost Activity Cost $180,000 $160,000 $140,000 $120.000 $100,000 $80,000 $60,000 $40,000 $20,000 Final inspection Producing product Disposing of scrap Inspecting work in process Preventive machine... Correcting invoice errors Disposing of incoming... Responding to customer.. Expediting late production Inspecting incoming materials Activity

What type of chart is a Pareto chart : - Bar Diagram

Which activity appears first, in order from left to right : - Producing product

Answer 3 :- Cost of Quality information as a percentages of total department costs

Cost of Quality Classification	Activity Cost	% of Total Department Cost
Prevention Cost	$34,580	7.00%
Appraisal Cost	103740	21.00%
Internal Failure Cost	133380	27.00%
External Failure Cost	54340	11.00%
Not a cost of Quality	167960	34.00%
Total	$494,000	100.00%

.

Answer 4 : - Value added and non value Added Information as a percentages of total department costs

Particulars	Activity Cost	% of Total Department Cost
Value-added	$306,280	62.00%
Non-value-added	$187,720	38.00%
Total	$494,000	100.00%

.

Answer 5 :- Fill in the Blanks

The department has 38% of its total cost as cost of Poor Quality (or failure cost). Internal failure cost represent 27% of its total costs. This means there is opportunity for cost savings. External failure cost represents as 11% of the total department costs.

Note :- Alternative answer to fill in the blanks

The department has 38% of its total cost as cost of Non Value Added Activity.