Problem 27-4 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 activity analysis revealed the following: Activities Activity Cost Correcting invoice errors $8,920 Disposing of incoming materials with poor quality 6,690 Disposing of scrap 31,220 Expediting late production 26,760 Final inspection 15,610 > Inspecting incoming materials 4,460 Inspecting work in process 24,530 Preventive machine maintenance 15,610 Producing product 78,050 Responding to customer quality complaints 11,150 Total $223,000 The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap. ? Problem 27-4 eBook 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 Correcting invoice errors $8,920 Disposing of incoming materials with poor quality 6,690 Disposing of scrap 31,220 Expediting late production 26,760 Final inspection 15,610 Inspecting incoming materials Inspecting work in process Preventive machine maintenance Producing product Responding to customer quality complaints 4,460 24,530 15,610 78,050 11,150 Total $223,000 Value-Added/ Non-Value-Added Classification ? 2. 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 Prevention Percent of Total Activity Cost Department Cost % Appraisal Internal failure External failure Not costs of quality Total % % % % % 3. Determine the percentages of total costs that are value-added and non-value-added. Value-added Non-value-added Total Activity Cost Percent of Total Department Cost % % % 4. The department has % of its total costs as non-value-added. Internal failure costs represent % of the total costs. This means there is significant opportunity for cost savings. External failure costs represent % of the total department costs. ?