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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

Evans Inc. has the following two activities: (1) Reworking products, cost: $740,000. The reworking cost of the most efficient similar-sized competitor is $200,000. (2) Purchasing parts, cost: $900,000 (45,000 purchasing hours). A benchmarking study reveals that the most efficient level for Evans would use 24,000 purchasing hours and entail a cost of $450,000.

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 in the problem that is $740,000. Therefore, the value of non-value added cost of reworking activity is $740,000.

Use the following Formula to calculate the non-value added costs of purchasing activity:

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

Substitute, 45,000 purchasing hours for actual quantity, purchasing hours for value added quantity and $20 for cost per purchase order

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