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 |
$11,250 |
Disposing of incoming materials with poor quality |
9,000 |
Disposing of scrap |
31,500 |
Expediting late production |
27,000 |
Final inspection |
22,500 |
Inspecting incoming materials |
4,500 |
Inspecting work in process |
22,500 |
Preventive machine maintenance |
15,750 |
Producing product |
67,500 |
Responding to customer quality complaints |
13,500 |
Total |
$225,000 |
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?
Which activity appears first, in order from left to right?
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 |
$11,250 |
|
|
|
Disposing of incoming materials with poor quality |
9,000 |
|
|
Disposing of scrap |
31,500 |
|
|
Expediting late production |
27,000 |
|
|
Final inspection |
22,500 |
|
|
Inspecting incoming materials |
4,500 |
|
|
Inspecting work in process |
22,500 |
|
|
Preventive machine maintenance |
15,750 |
|
|
Producing product |
67,500 |
|
|
Responding to customer quality complaints |
13,500 |
|
|
Total |
$225,000 |
|
|
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 |
$ |
|
|
% |
Appraisal |
|
|
|
% |
Internal failure |
|
|
|
% |
External failure |
|
|
|
% |
Not costs of quality |
|
|
|
% |
Total |
$ |
|
|
% |
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 |
$ |
|
|
% |
Non-value-added |
|
|
|
% |
Total |
$ |
|
|
% |
5.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.