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	$26,500		External failure	Non-value-added
Cable signal testing	66,300		Appraisal	Value-added
Reinstalling service (installed incorrectly the first time)	57,000		External failure	Non-value-added
Repairing satellite equipment	15,600		Internal failure	Non-value-added
Repairing underground cable connections to the customer	17,200		External failure	Non-value-added
Replacing old technology cable with higher quality cable	73,700		Prevention	Value-added
Replacing old technology signal switches with higher quality switches	84,200		Prevention	Value-added
Responding to customer home repair requests	31,900		External failure	Non-value-added
Training employees	17,600		Prevention	Value-added
Total activity cost	$390,000

Feedback

Correct

b. Prepare a cost of quality report. Assume that sales are $1,950,000. 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	$	%	%

Feedback

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	$	%

Answer 1

b)
Quality Cost Classification	Quality cost (A)	Percent of Total Quality cost ( A / $ 390,000)	Percent of Total sales (A / $ 1,950,000 )
Prevention ( $ 73,700+ $ 84,200 + $ 17,600)	$ 175,500	45	9
Appraisal	$ 66,300	17%	3.4%
Internal failure	$ 15,600	4%	0.8%
External failure ( $ 26,500 + $ 57,000 + $ 17,200 + $ 31,900 )	$ 132,600	34%	6.8%
Total	$ 390,000	100%	20%
c)
Category	Amount	Percent
Value added ( $ 66,300 + $ 73,700+ $ 84,200 + $ 17,600)	$ 241,800	62%
Non Value added	$ 148,200	38
Total	$ 390,000	100%