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	$21,950		External failure	Non-value-added
Disposing of incoming materials with poor quality	17,560		Internal failure	Non-value-added
Disposing of scrap	57,070		Internal failure	Non-value-added
Expediting late production	48,290		Internal failure	Non-value-added
Final inspection	39,510		Appraisal	Value-added
Inspecting incoming materials	8,780		Appraisal	Value-added
Inspecting work in process	48,290		Appraisal	Value-added
Preventive machine maintenance	30,730		Prevention	Value-added
Producing product	144,870		Not a quality cost	Value-added
Responding to customer quality complaints	21,950		External failure	Non-value-added
Total	$439,000

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? 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 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 non-value-added . Internal failure costs represent 28% of the total costs. This means there is significant opportunity for cost savings. External failure costs represent 10% of the total department costs