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:

Activities	Activity Cost
Correcting invoice errors	$12,000
Disposing of incoming materials with poor quality	9,600
Disposing of scrap	33,600
Expediting late production	28,800
Final inspection	21,600
Inspecting incoming materials	4,800
Inspecting work in process	24,000
Preventive machine maintenance	16,800
Producing product	74,400
Responding to customer quality complaints	14,400
Total	$240,000

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?

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

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	$12,000
Disposing of incoming materials with poor quality	9,600
Disposing of scrap	33,600
Expediting late production	28,800
Final inspection	21,600
Inspecting incoming materials	4,800
Inspecting work in process	24,000
Preventive machine maintenance	16,800
Producing product	74,400
Responding to customer quality complaints	14,400
Total	$240,000

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.