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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	$12,040
Disposing of incoming materials with poor quality	9,030
Disposing of scrap	42,140
Expediting late production	36,120
Final inspection	21,070
Inspecting incoming materials	6,020
Inspecting work in process	27,090
Preventive machine maintenance	21,070
Producing product	111,370
Responding to customer quality complaints	15,050
Total	$301,000

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

a) 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	$			%
Appraisal				%
Internal failure				%
External failure				%
Not costs of quality				%
Total	$			%

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

	Activity Cost			Percent of Total Department Cost
Value-added	$			%
Non-value-added				%
Total	$			%

c.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.

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