Pareto ChartandCost of Quality Reportfor 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 anactivity analysisto gain a better insight into these costs. The activity analysis revealed the following.

The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap.

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.

ActivityActivity CostCost of Quality ClassificationVA/NVACorrecting invoice errors$7,500External failure

Non-value-added

Disposing of incoming materials with poor quality15,000Internal failure

Non-value-added

Disposing of scrap27,500Internal failure

Non-value-added

Expediting late production22,500Internal failure

Non-value-added

Final inspection20,000Appraisal

Value-added

Inspecting incoming materials5,000Appraisal

Value-added

Inspecting work in process25,000Appraisal

Value-added

Preventive machine maintenance15,000Prevention

Value-added

Producing product97,500Not a quality cost

Value-added

Responding to customer quality complaints15,000External failure

Non-value-added

Total$250,000

3.Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and notcosts of quality(producing product).

Quality Cost

ClassificationActivity CostPercent of Total

Department CostPrevention$fill in the blank 22

fill in the blank 23

%Appraisalfill in the blank 24

fill in the blank 25

%Internal failurefill in the blank 26

fill in the blank 27

%External failurefill in the blank 28

fill in the blank 29

%Not a cost of qualityfill in the blank 30

fill in the blank 31

%Total$fill in the blank 32

fill in the blank 33

%

4.Determine the percentages of total costs that are value- and non-value-added.

Activity CostPercent of Total

Department CostValue-added$fill in the blank 34

fill in the blank 35

%Non-value-addedfill in the blank 36

fill in the blank 37

%Total$fill in the blank 38

fill in the blank 39

%

5.The company has 65% of its total costs asvalue-added

.Internal failure

costs represent 26% of the total costs.External failure

costs are 9% of the total. There is only one activity classified as a(n)prevention

cost.