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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Suppose that a company is spending $60,000 per year for inspecting, $30,000 for purchasing, and $40,000 for reworking products. A good estimate of nonvalue-added costs would be

  1. a. $70,000.
  2. b. $130,000.
  3. c. $40,000.
  4. d. $90,000.
  5. e. $100,000.

To determine

Identify the option which is providing a correct estimate of the non-value added cost.

Explanation

Value-Added Activities:

Activities that are necessary to be performed and cannot be eliminated are referred as value-added activities. Properties of value-added activities are that, these activities change the state which could not occur because of preceding activities, and these activities are necessary for other activities.

e.

Purchase cost is a value added activity, it is essential to be incurred to procure raw material.

However,inspection would not be required in case, quality is maintained continuously. Also, inspection does not change state of the product. Similarly, amount spent for reworking can be eliminated by increasing the quality of the material. Therefore, non-value added cost would be $100,000($60,000+$40,000), which is computed by adding inspection cost and reworking cost. Therefore, this is the correct option.

a.

$70,000 ($30,000+$40,000) is computed by adding purchase cost and reworking cost

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