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	$21,600
Disposing of incoming materials with poor quality	18,000
Disposing of scrap	54,000
Expediting late production	46,800
Final inspection	28,800
Inspecting incoming materials	7,200
Inspecting work in process	32,400
Preventive machine maintenance	25,200
Producing product	108,000
Responding to customer quality complaints	18,000
Total	$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 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. Cost of Quality Classification Value-Added/ Non-Value Added Classification Activity Activity Cost Correcting invoice errors $21,600 External failure Non-value-added Disposing of incoming materials with poor quality 18,000 Internal failure Non-value-added Disposing of scrap 54,000 Internal failure Non-value-added Expediting late production 46,800 Internal failure Non-value-added Final inspection 28,800 Appraisal Value-added Inspecting incoming materials 7,200 Appraisal Value-added 32,400 Appraisal Inspecting work in process Preventive machine maintenance Value-added Value-added 25,200 Prevention Producing product 108,000 Not costs of quality Value-added Responding to customer quality complaints 18,000 External failure Non-value-added Total $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 Percent of Total Classification Activity Cost 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. Percent of Total Department Cost Activity Cost Value-added $ % Non-value-added % Total % % of the total costs. This means there is significant opportunity for cost 5. The department has % of its total costs as non-value-added. Internal failure costs represent savings. External failure costs represent % of the total department costs