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Managerial Accounting: The Corners...

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

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Nonvalue-Added Costs

Lemmons Inc. has the following two activities: (1) Retesting reworked products, cost: $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.

To determine

Calculate the non-value added cost of each activity.

Explanation

Non-Value Added Cost:

Non-value added cost refers to the cash and cash equivalents which are incurred due to the non-value activities or by the ineffective presentation of value-added activities.

Only the value of actual quantity is given, that is $720,000. Therefore, the value of non-value added cost of retesting reworked activity is $720,000.

Use the following formula to calculate the non-value added costs of welding sub-assemblies:

Non-value added cost=(Actual quantityvalue added quantity)×Cost per purchase order

Substitute, 67,500 welding hours for actual quantity, 54,000 welding hours for value added quantity and $20 for cost per purchase order

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