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:

ActivitiesActivity CostCorrecting invoice errors$18,000Disposing of incoming materials with poor quality14,400Disposing of scrap50,400Expediting late production43,200Final inspection25,200Inspecting incoming materials7,200Inspecting work in process32,400Preventive machine maintenance25,200Producing product122,400Responding to customer quality complaints21,600Total$360,000

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 chartLine chartOrganization chartPie chartBar chart

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

Disposing of scrapCorrecting invoice errorsExpediting late productionInspecting work in processProducing productCorrecting invoice errors

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 ClassificationValue-Added/ Non-Value-Added ClassificationCorrecting invoice errors$18,000 AppraisalExternal failureInternal failureNot costs of qualityPreventionExternal failureNon-value-addedValue-addedNon-value-addedDisposing of incoming materials with poor quality14,400AppraisalExternal failureInternal failureNot costs of qualityPreventionInternal failureNon-value-addedValue-addedNon-value-addedDisposing of scrap50,400AppraisalExternal failureInternal failureNot costs of qualityPreventionInternal failureNon-value-addedValue-addedNon-value-addedExpediting late production43,200AppraisalExternal failureInternal failureNot costs of qualityPreventionInternal failureNon-value-addedValue-addedNon-value-addedFinal inspection25,200AppraisalExternal failureInternal failureNot costs of qualityPreventionAppraisalNon-value-addedValue-addedValue-addedInspecting incoming materials7,200AppraisalExternal failureInternal failureNot costs of qualityPreventionAppraisalNon-value-addedValue-addedValue-addedInspecting work in process32,400AppraisalExternal failureInternal failureNot costs of qualityPreventionAppraisalNon-value-addedValue-addedValue-addedPreventive machine maintenance25,200AppraisalExternal failureInternal failureNot costs of qualityPreventionPreventionNon-value-addedValue-addedValue-addedProducing product122,400AppraisalExternal failureInternal failureNot costs of qualityPreventionNot costs of qualityNon-value-addedValue-addedValue-addedResponding to customer quality complaints21,600AppraisalExternal failureInternal failureNot costs of qualityPreventionExternal failureNon-value-addedValue-addedNon-value-addedTotal$360,000

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 CostPercent of Total Department CostPrevention$fill in the blank 23 fill in the blank 24 %Appraisalfill in the blank 25 fill in the blank 26 %Internal failurefill in the blank 27 fill in the blank 28 %External failurefill in the blank 29 fill in the blank 30 %Not costs of qualityfill in the blank 31 fill in the blank 32 %Total$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 CostPercent of Total Department CostValue-added$fill in the blank 35 fill in the blank 36 %Non-value-addedfill in the blank 37 fill in the blank 38 %Total$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.