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	$22,600
Cable signal testing	79,900
Reinstalling service (installed incorrectly the first time)	48,500
Repairing satellite equipment	18,800
Repairing underground cable connections to the customer	14,700
Replacing old technology cable with higher quality cable	108,600
Replacing old technology signal switches with higher quality switches	124,100
Responding to customer home repair requests	27,000
Training employees	25,800
Total activity cost	$470,000

b. Prepare a cost of quality report. Assume that sales are $2,350,000. 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	$	%	%

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	$	%

d. What percentage of total costs of quality are considered to be value-added?

Answer 1

Answers

[a]

Quality Control Activities	Activity Cost	Quality Cost Classification	Value-Added/
			Non-Value-Added
			Classification
Billing error correction	$22,600	External failure	Non value added
Cable signal testing	$79,900	Appraisal	Value added
Reinstalling service (installed incorrectly the first time)	$48,500	External failure	Non value added
Repairing satellite equipment	$18,800	Internal failure	Non value added
Repairing underground cable connections to the customer	$14,700	External failure	Non value added
Replacing old technology cable with higher quality cable	$108,600	Prevention	Value added
Replacing old technology signal switches with higher quality switches	$124,100	Prevention	Value added
Responding to customer home repair requests	$27,000	External failure	Non value added
Training employees	$25,800	Prevention	Value added
Total activity cost	$470,000

[b]

Quality Cost classification	Quality cost	% of total quality cost	% of total sales
Prevention	$258,500	55.0%	11.0%
Appraisal	$79,900	17.0%	3.4%
Internal failure	$18,800	4.0%	0.8%
External failure	$112,800	24.0%	4.8%
Total	$470,000	100.0%	15.7%

[c]

Category	Amount	%
Value added	$338,400	72.0%
Non Value added	$131,600	28.0%
Total	$470,000	100.0%

[d]

percentage of total costs of quality that are considered to be value-added = 72%