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	$21,150
Disposing of incoming materials with poor quality	16,920
Disposing of scrap	59,220
Expediting late production	50,760
Final inspection	42,300
Inspecting incoming materials	8,460
Inspecting work in process	46,530
Preventive machine maintenance	29,610
Producing product	122,670
Responding to customer quality complaints	25,380
Total	$423,000

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	$21,150		External failure	Non-value-added
Disposing of incoming materials with poor quality	16,920		Internal failure	Non-value-added
Disposing of scrap	59,220		Internal failure	Non-value-added
Expediting late production	50,760		Internal failure	Non-value-added
Final inspection	42,300		Appraisal	Value-added
Inspecting incoming materials	8,460		Appraisal	Value-added
Inspecting work in process	46,530		Appraisal	Value-added
Preventive machine maintenance	29,610		Prevention	Value-added
Producing product	122,670		Not costs of quality	Value-added
Responding to customer quality complaints	25,380		External failure	Non-value-added
Total	$423,000

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	$fill in the blank 23			fill in the blank 24 %
Appraisal	fill in the blank 25			fill in the blank 26 %
Internal failure	fill in the blank 27			fill in the blank 28 %
External failure	fill in the blank 29			fill in the blank 30 %
Not costs of quality	fill in the blank 31			fill in the blank 32 %
Total	$fill in the blank 33			fill in the blank 34%

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	$fill in the blank 35			fill in the blank 36 %
Non-value-added	fill in the blank 37			fill in the blank 38 %
Total	$fill in the blank 39			fill in the blank 40 %

5. The department has fill in the blank 41% of its total costs as non-value-added. Internal failure costs represent fill in the blank 42% of the total costs. This means there is significant opportunity for cost savings. External failure costs represent fill in the blank 43% of the total department costs.