Question

In chapter 26 we discuss value added (VA) and non value added activities (NVA). Each activity performed by an organization creates cost. If the activity does not create any value for the customer, its cost represents wasted resources. Provide examples of VA and NVA packaging you have encountered in the produce section of a grocery store.

Answer 1

Value added activities are those activities which increases the value of product or enhance the performance/service/utility of a product which is offered by the organisation. In short term, any cost incurred as to increase the value/performance/utility of a product shall be considered as VALUE ADDED COST

And any other cost ie which does not increases the value or performance or utility of asset, but are necessarily to be incurred to maintain production or sales of the product are termed as NON VALUE ADDED COST.

Examples:

1. Company hiring the best lawyer or CPA to represent itself in front of authorities for Tax cases, resulting in expenditure of $50,000 durings a year. Now this expenditure does not increases the value/performance/utility of a product. Hence the above cost is a NON VALUE ADDED COST
2. Company replaces the old packers of product with the new packers of product who provides better packaging material as compared to former one, costing $5,000 to company. Such expenditure incurred will not result in increasing the value/performance/utility of a product as generally customers throw the packing material in trash irrespective of their built quality. Hence such cost is a NON VALUE ADDED COST
3. Company started delivering the groceries to customer at their home by employing 2 employees at annual salary of $5,000 and veichle expenses of $1,000. It is expected that due to availability pf home delivery facility, sales will be increased. Now such expenditure increases the sales of products. Therefore such cost is a VALUE ADDED COST.
4. Company sent pamphlet with the daily local newspaper at a negotiated cost of $3,000 annualy. Such pamphlet includes the information about ongoing sale as well as reduced prices in a sale. This will draw additional customers and also increase the sale of non discounted products. Hence the above expenditure is a VALUE ADDED COST