Question

Cost of Quality and Value-Added/Non-Value-Added Reports for a Service Company

Three Rivers Inc. provides cable TV and Internet service to the local community. The activities and activity costs of Three Rivers are identified as follows:

a. Identify the cost of quality classification for each activity and whether the activity is value-added or non-value-added.

Quality Control Activities	Activity Cost		Quality Cost Classification	Value-Added/ Non-Value-Added Classification
Billing error correction	$39,000		External failure	Non-value-added
Cable signal testing	117,000		Appraisal	Value-added
Reinstalling service (installed incorrectly the first time)	83,900		External failure	Non-value-added
Repairing satellite equipment	54,600		Internal failure	Non-value-added
Repairing underground cable connections to the customer	25,400		External failure	Non-value-added
Replacing old technology cable with higher quality cable	173,600		Prevention	Value-added
Replacing old technology signal switches with higher quality switches	198,400		Prevention	Value-added
Responding to customer home repair requests	46,700		External failure	Non-value-added
Training employees	41,400		Prevention	Value-added
Total activity cost	$780,000

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Correct

b. Prepare a cost of quality report. Assume that sales are $3,120,000. If required, round percentages to one decimal place.

Three Rivers Inc.
Cost of Quality Report
Quality Cost Classification	Quality Cost	Percent of Total Quality Cost	Percent of Total Sales
Prevention	$	%	%
Appraisal		%	%
Internal failure		%	%
External failure		%	%
Total	$	%	%

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b. Classify each activity as either prevention, appraisal, internal failure or external failure. List the total costs of each of these four categories in a column called quality cost. In a separate column, determine the percent of each quality cost as compared to the total quality costs by dividing individual quality cost categories by the total quality cost. In another column, determine the percent of each quality cost classification as compared to total sales by dividing individual quality cost classes by the total sales amount. Total all columns. Remember that the Percent of total quality cost column should total to 100%.

c. Prepare a value-added/non-value-added analysis.

Three Rivers Inc.
Value-Added/Non-Value-Added Activity Analysis
Category	Amount	Percent
Value-added	$	%
Non-value-added		%
Total	$	%

Feedback

Answer 1

[a]

Quality Control Activities	Activity Cost	Quality Cost Classification	Value-Added/
			Non-Value-Added
			Classification
Billing error correction	$39,000	External failure	Non value added
Cable signal testing	$117,000	Appraisal	Value added
Reinstalling service (installed incorrectly the first time)	$83,900	External failure	Non value added
Repairing satellite equipment	$54,600	Internal failure	Non value added
Repairing underground cable connections to the customer	$25,400	External failure	Non value added
Replacing old technology cable with higher quality cable	$173,600	Prevention	Value added
Replacing old technology signal switches with higher quality switches	$198,400	Prevention	Value added
Responding to customer home repair requests	$46,700	External failure	Non value added
Training employees	$41,400	Prevention	Value added
Total activity cost	$780,000

[b]

Quality Cost classification	Quality cost	% of total quality cost	% of total sales
Prevention	$413,400	53.0%	13.3%
Appraisal	$117,000	15.0%	3.8%
Internal failure	$54,600	7.0%	1.8%
External failure	$195,000	25.0%	6.3%
Total	$780,000	100.0%	25.0%

[c]

Category	Amount	%
Value added	$530,400	68.0%
Non Value added	$249,600	32.0%
Total	$780,000	100.0%