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	$29,800		External failure	Non-value-added
Cable signal testing	120,700		Appraisal	Value-added
Reinstalling service (installed incorrectly the first time)	64,100		External failure	Non-value-added
Repairing satellite equipment	49,700		Internal failure	Non-value-added
Repairing underground cable connections to the customer	19,400		External failure	Non-value-added
Replacing old technology cable with higher quality cable	164,000		Prevention	Value-added
Replacing old technology signal switches with higher quality switches	187,400		Prevention	Value-added
Responding to customer home repair requests	35,800		External failure	Non-value-added
Training employees	39,100		Prevention	Value-added
Total activity cost	$710,000

b. Prepare a cost of quality report. Assume that sales are $3,550,000. 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?
72.0%

Answer 1