Question

Value- and Non-Value-Added Cost Reporting

Cicleta Manufacturing has four activities: receiving materials, assembly, expediting products, and storing goods. Receiving and assembly are necessary activities; expediting and storing goods are unnecessary. The following data pertain to the four activities for the year ending 2014 (actual price per unit of the activity driver is assumed to be equal to the standard price):

Activity	Activity Driver	SQ	AQ	SP
Receiving	Receiving orders	10,400	21,000	$18
Assembly	Labor hours	87,000	105,000	13
Expediting	Orders expedited	0	7,000	43
Storing	Number of units	0	14,000	6

Required:

1. Prepare a cost report for the year ending 2014 that shows value-added costs, non-value-added costs, and total costs for each activity. If an amount is zero, enter "0".

Cicleta Manufacturing
Value and Non-Value-Added Cost Report
For the Year Ended 2014
Activity	Value-Added Costs	Non-Value-Added Costs	Total Costs
Receiving	$	$	$
Assembly
Expediting
Storing
Total	$	$	$

2. Explain why expediting products and storing goods are non-value-added activities.

Answer 1

In the context of this question, value added cost can be inferred as the standard cost for the standard products proposed to be produced.

Thus, value added cost = SQ x SP

Non-value added costs, on the other hand, refer to the additional costs incurred that do not result in increased efficiency of the production process.

Thus, non-value added costs = (AQ-SQ) x SP

In the given case, the costs can be categorised into value-additive and non-value additive using the formulae given as above.

Cost Report of Cicleta Manufacturing for 2014
Activity	Value added costs	Non-value added costs	Total
SQ x SP	(AQ-SQ) x SP
Receiving	$ 187,200	$ 190,800	$ 378,000
Assembly	$ 1,131,000	$ 234,000	$ 1,365,000
Expediting	0	$ 301,000	$ 301,000
Storing	0	$ 84,000	$ 84,000

Note: As a matter of cross-checking the accuracry of the answer, it may be a good practice that the amount appearing in the total column equals the actual cost incurred i.e. AQ x SP.

Explain why expediting products and storing goods are non-value-added activities

Non-value added activities refer to activities that neither increase the value of the product to the customer nor make the production more cost-effective than its earlier situation.

Costs incurred towards expediting need to be incurred in order to ensure that targets are met as per given timeframe. These costs need to be incurred in cases where there is a possibility that the current state of production may not lead to adherence of the targets. These costs could have been easily avoided if the manufacturing operations were functioning as per schedule and are thus avoidable in nature. Thus, since these costs do not result in cost-effectiveness or value addition, the same are non-value added activities.

Costs incurred towards storage of goods non-value added in nature since the same only results in moving the goods to an intermediary location before the final process of sale. Storage by itself does not add any value or result in decline in cost of production.

In case of any questions on the above, do drop the same in comments section.

All the best!