Question

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	$48,600
Cable signal testing	114,000
Reinstalling service (installed incorrectly the first time)	104,600
Repairing satellite equipment	53,200
Repairing underground cable connections to the customer	31,600
Replacing old technology cable with higher quality cable	146,800
Replacing old technology signal switches with higher quality switches	167,800
Responding to customer home repair requests	58,400
Training employees	35,000
Total activity cost	$760,000

b. Prepare a cost of quality report. Assume that sales are $3,040,000. 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

Quality Control Activities	Activity Cost	Quality Cost Classification	VA/NVA
Billing error correction	48600	External failure	Non-value-added
Cable signal testing	1,14,000	Appraisal	Value-added
Reinstalling service (installed incorrectly the first time)	1,04,600	External failure	Non-value-added
Repairing satellite equipment	53,200	Internal failure	Non-value-added
Repairing underground cable connections to the customer	31,600	External failure	Non-value-added
Replacing old technology cable with higher quality cable	1,46,800	Prevention	Value-added
Replacing old technology signal switches with higher quality switches	1,67,800	Prevention	Value-added
Responding to customer home repair requests	58,400	External failure	Non-value-added
Training employees	35,000	Prevention	Value-added
Total	760000

Three Rivers Inc.
Cost of Quality Report
Quality Cost Classification	Quality Cost	Percent of Total Quality Cost	Percent of Total Sales
Prevention	3,49,600	46%	11.50%
Appraisal	1,14,000	15%	3.75%
Internal failure	53,200	7%	1.75%
External failure	2,43,200	32%	8%
Total	7,60,000	100	25%

Three Rivers Inc.
Value-Added/Non-Value-Added Activity Analysis
Category	Amount	Percent
Value-added	4,63,600	61%
Non-value-added	2,96,400	39%
Total	7,60,000	100%

61% of total costs of quality are considered to be value-added