Question

5.7 Brief Exercise 5-27 Nonvalue Added Costs Lemmons Inc. has the following two activities: (1) Retesting reworked products, con $720,000. The retesting cost of the most efficient competitor is $225,000. (2) Welding sub assemblies, cost: $1,350,000 (67,500 welding hours). A benchmarking study reveals that the most efficient level for Lemmons would use 54,000 welding hours and entail a cost of $1,080,000. Required: Determine the nonvalue-added cost of each activity.

Answer 1

Non value added cost :- a non value added cost is a production expense that doesn't increase the amount customers are willing to pay for the finished product it doesn't make the product more appealing to customers and theyw not pay any more money for the product because the cost is incurred.

Non value added cost for necessary step in product development and enhancement, even though it does not add benefit in the eyes of customer. Fixing faulty product for unappealing product packaging essential in keeping business, but they do not add value to the product. Patents are another non value adding cost they did not increase the value of the product to customers, but are important to a company because it allows a company be a sole owners of the idea. Many companies look to decrease the non value added cost because they create more expenses and not added to the profit of the product.

In the given case the non value added costs in each activity are :-

Activity 1 :- as our competitor getting the same benefit of retesting the reworked products at the cost of $225000 but we are incurring the cost of $720000 for the same benefit. Hence the cost incurred in excess of the $225000 is due to inefficiency in the management of the company and it will not add any benefit to product hence it will be considered as non value added cost.

Non value added cost of activity 1 :-

= $720000 - $225000

= $495000

Activity 2 :- the cost of welding sub assemblies are $1350000 and the same benefit will derive by the organization is everyone work effective at the cost of $10800000.

The excess cost will not derive any benefit to organization hence it will be considered as non value added cost.

Non value added cost of activity 2 :-

= $1350000 - $1080000

= $270000

Therefore the non value added cost of

Activity-1 is $495000 and Activity-2 is $270000.

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