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	$33,100
Cable signal testing	79,800
Reinstalling service (installed incorrectly the first time)	71,100
Repairing satellite equipment	17,100
Repairing underground cable connections to the customer	21,500
Replacing old technology cable with higher quality cable	129,300
Replacing old technology signal switches with higher quality switches	147,700
Responding to customer home repair requests	39,600
Training employees	30,800
Total activity cost	$570,000

b. Prepare a cost of quality report. Assume that sales are $2,850,000. 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?

• 54.0%
• 14.0%
• 68.0%
• None of these options are correct.

Answer 1

• Requirement [a]

Quality Control Activities	Activity Cost	Quality Cost Classification	Value-Added/
			Non-Value-Added
			Classification
Billing error correction	$33,100	External failure	Non value added
Cable signal testing	$79,800	Appraisal	Value added
Reinstalling service (installed incorrectly the first time)	$71,100	External failure	Non value added
Repairing satellite equipment	$17,100	Internal failure	Non value added
Repairing underground cable connections to the customer	$21,500	External failure	Non value added
Replacing old technology cable with higher quality cable	$129,300	Prevention	Value added
Replacing old technology signal switches with higher quality switches	$147,700	Prevention	Value added
Responding to customer home repair requests	$39,600	External failure	Non value added
Training employees	$30,800	Prevention	Value added
Total activity cost	$570,000

• [b]

Quality Cost classification	Quality cost	% of total quality cost	% of total sales
Prevention	$307,800	54.0%	10.8%
Appraisal	$79,800	14.0%	2.8%
Internal failure	$17,100	3.0%	0.6%
External failure	$165,300	29.0%	5.8%
Total	$570,000	100.0%	20.0%

• [c]

Category	Amount	%
Value added	$387,600	68.0%
Non Value added	$182,400	32.0%
Total	$570,000	100.0%

• [d] Value added = 68% of total quality cost.