Chapter 27, Problem 27.4BPR

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 activity analysis revealed the following:

Activities	Activity Cost
Correcting invoke errors	$ 7,500
Disposing of incoming materials with poor quality	15,000
Disposing of scrap	27,500
Expediting late production	22,500
Final inspection	20,000
Inspecting incoming materials	5,000
Inspecting work in process	25,000
Preventive machine maintenance	15,000
Producing product	97,500
Responding to customer quality complaints	15,000
Total	$250,000

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

Instructions

1. 1. Prepare a Pareto chart of the company activities.
2. 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.
3. 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.
4. 4. Determine the percentages of total costs that are value-added and non-value-added.
5. 5. Interpret the information.