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:

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	VA/NVA
Correcting invoice errors	$21,600
Disposing of incoming materials with poor quality	17,280
Disposing of scrap	60,480
Expediting late production	51,840
Final inspection	43,200
Inspecting incoming materials	8,640
Inspecting work in process	47,520
Preventive machine maintenance	30,240
Producing product	125,280
Responding to customer quality complaints	25,920
Total	$432,000

2. 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?

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

3. Use the activity cost information to determine the percentages of total department costs that are prevention, appraisal, internal failure, external failure, and not costs of quality. If required, round percentages to one decimal place.

Quality Cost Classification	Activity Cost			Percent of Total Department Cost
Prevention	$			%
Appraisal				%
Internal failure				%
External failure				%
Not a cost of quality				%
Total	$			%

4. Determine the percentages of total department costs that are value-added and non-value-added. If required, round percentages to one decimal place.

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

5. The department has 41% of its total costs as . costs represent 30% of the total costs. This means there is opportunity for cost savings. costs represent 11% of the total department costs.