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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

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 $22,400
Disposing of incoming materials with poor quality 17,920
Disposing of scrap 67,200
Expediting late production 58,240
Final inspection 44,800
Inspecting incoming materials 8,960
Inspecting work in process 44,800
Preventive machine maintenance 31,360
Producing product 129,920
Responding to customer quality complaints 22,400
Total $448,000

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 chart

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

Disposing of scrapCorrecting invoice errorsExpediting late productionInspecting work in processProducing 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.

Activity Activity Cost Cost of Quality Classification Value-Added/ Non-Value-Added Classification
Correcting invoice errors $22,400

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Disposing of incoming materials with poor quality 17,920

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Disposing of scrap 67,200

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Expediting late production 58,240

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Final inspection 44,800

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Inspecting incoming materials 8,960

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Inspecting work in process 44,800

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Preventive machine maintenance 31,360

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Producing product 129,920

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Responding to customer quality complaints 22,400

AppraisalExternal failureInternal failureNot costs of qualityPrevention

Non-value-addedValue-added

Total $448,000

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 Cost Percent of Total Department Cost
Prevention $fill in the blank 23 fill in the blank 24 %
Appraisal fill in the blank 25 fill in the blank 26 %
Internal failure fill in the blank 27 fill in the blank 28 %
External failure fill in the blank 29 fill in the blank 30 %
Not costs of quality fill 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 Cost Percent of Total Department Cost
Value-added $fill in the blank 35 fill in the blank 36 %
Non-value-added fill 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.

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