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	$28,000		External failure	Non-value-added
Cable signal testing	85,000		Appraisal	Value-added
Reinstalling service (installed incorrectly the first time)	60,200		External failure	Non-value-added
Repairing satellite equipment	25,000		Internal failure	Non-value-added
Repairing underground cable connections to the customer	18,200		External failure	Non-value-added
Replacing old technology cable with higher quality cable	105,000		Prevention	Value-added
Replacing old technology signal switches with higher quality switches	120,000		Prevention	Value-added
Responding to customer home repair requests	33,600		External failure	Non-value-added
Training employees	25,000		Prevention	Value-added
Total activity cost	$500,000

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Correct

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

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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%.

Learning Objective 1 and Learning Objective 3.

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	$	%

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