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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 activity analysis revealed the following:
Activities | Activity Cost |
Correcting invoice errors | $8,500 |
Disposing of income materials with poor quality | 16,000 |
Disposing of scrap | 28,500 |
Expediting late production | 21,500 |
Final inspection | 19,000 |
Inspecting incoming materials | 5,000 |
Inspecting work in process | 25,000 |
Preventive machine maintenance | 15,000 |
Producing product | 95,500 |
Responding to customer quality complaints | 15,000 |
Total | 249,000 |
The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap.
Instructions
- Prepare a Pareto chart of the company activities.
- 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.
- 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.
- Determine the percentages of total costs that are value-added and non-value-adde
- Interpret the information.
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