Question

Explain the difference between a value-added activity and a non-value added activity.

Answer 1

The central difference between a value-added cost and a non-value-added cost is that a value-added cost is money spent that increases a customer’s perception of the value of a given product or service. Value-added activities provide a number of benefits to your business, but some non-valued-added expenses are necessary.

Changes

A value-added cost normally contributes to a significant change in the form, fit, style, visual appeal or function of a product or service. Paying for a large-sized product, adding customized options to your solutions and developing more environmentally-friendly goods are examples of value-added activities that change the nature of your offering. Paying for patent development and registration benefits your business, but doesn’t change the form of your solution.

Customer Value

Value-added costs increase the benefits of your offering to customers. Providing a one-year warranty with a product purchase offsets the risks of a purchase for a customer. Often, customers will pay more for a product that comes with a warranty than they would for one that doesn’t. The costs involved in the offer included preparation time and the costs of the products or retribution provided if a product breaks. By definition a non-value-added cost doesn’t increase the customer’s perception of worth. If you make more durable packaging, but the customer doesn’t change his perception of worth, the cost adds no value.

Benefits

Value-added and non-value-added costs can both have benefits. Increasing the value of what you offer may attract more customers. More customers means more revenue. More demand and greater perception of your product’s value allows you to increase your prices. Ideally, the increased revenue exceeds the increased costs, leading to improved profitability. While non-value added costs don’t contribute to more revenue and profits, they can provide long-term stability. Hiring legal experts to review documents and marketing claims doesn’t change the customer’s perception of your brand, but it may protect you from lawsuits or fines.

Challenges

Often, you know when you spend money whether it will go toward a value-added benefit. Marketing often impacts whether your investment actually does pay off. You might pay to add benefits to your product or service, but if you don’t research to understand what customers want or don’t effectively promote the benefits, it won’t matter. In essence, you may not know until down the road whether a cost leads to financial returns.