Question

Sampler, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company's three cost pools:

Activity	Cost Driver	Cost-Driver Quantity	Percent of Cost-Driver Activity for Bookstore transactions	Percent of Cost-Driver Activity for Transactions to Individuals
Incoming Receipts	Number of Purchase orders	3,000	20%	80%
Warehousing	Number of inventory moves	8,000	60	40
Outgoing shipments	Number of shipments	18,000	30	70

Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.

Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Sampler this past year?
C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

Answer 1

Part A

Non-value-added activities can be defined as activities that are either that are not necessary and dispensable or necessary but not efficient and improvable. In simple way, non-value-added activities are those which will not harm overall quality, performance, or perceived value even if they are eliminated.

Part B

Incoming receipts: $450,000 / 3,000 purchase orders = $150 per purchase order

Warehousing: $520,000 / 8,000 inventory moves = $65 per move

Outgoing shipments: $630,000 / 18,000 shipments = $35 per shipment

Warehousing: 500 moves x $65 = $32,500

Outgoing shipments: 400 shipments x $35=14,000

Total= $46,500

Part C

Sales to bookstores produced lower overall costs in both absolute dollars and as a percentage of sales. The main reason for this is that sales to individuals resulted in the sale of one or two copies per shipment and order. On the other hand, bookstore sales likely produced greater revenues and efficiencies because of the large number of texts sold per transaction.

Activity	Cost-DriverQuantity	% Bookstores	% Individuals	Driver-Quantity:Bookstores	Driver-Quantity:Individuals
Incoming receipts	3000	20%	80%	600	2400
Warehousing	8000	60%	40%	4300	3200
Outgoing shipment	18000	30%	70%	5400	12200

(8,000 moves x 60%) – 500 = 4300

(18,000 shipments x 70%) – 400=12200

	Bookstores	Individuals
Incoming receipts:
600 purchase orders x $150	$90,000
2400 purchase orders x $150		$360,000
Warehousing:
4300 Moves x $65	279500
3200 Moves x $65		208000
Outgoing shipments:
5400 shipments x $35	189000
12200 shipments x $35		427000
Total Cost	$558,500	$995,000
Cost as a percentage of sales:
$558,500 $8,400,000	6.65%
$995,000 $2,400,000		41.46%