Question

In: Accounting

Process value analysis (PVA) is fundamental to activity-based responsibility accounting, focuses on accountability for activities and...

Process value analysis (PVA) is fundamental to activity-based responsibility accounting, focuses on accountability for activities and emphasizes maximization of system-wide performance. PVA is concerned with (1) driver analysis, (2) activity analysis, and (3) performance measurement.

Activities consume resources and produce outputs. An activity driver is an output measure that measures the number of times an activity is performed and thus calculates the demands/resource supply of an activity. Although the cost of an activity can increase as an activity driver increases, an activity driver does not measure the root causes of activity costs. The purpose of driver analysis/activity analysis is to reveal root causes. Root causes are often identified by asking one or more “why” questions. Answers to why questions make possible the answers to “how” questions.

The process of identifying, describing, and evaluating the activities an organization performs is referred to as driver analysis/activity analysis. The most important part of driver analysis/activity analysis is an assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value. Activities can be classified as value-added and non-value-added.

Value-added activities are those activities that are necessary/unnecessary to remain in business and contribute to customer value and/or help meet organizational needs. Mandated activities are value-added. Discretionary activities are value-added if they meet the following three conditions (1) the activity produces a change of state, (2) no prior activity was supposed to create this change of state, and (3) the activity enables other activities to be performed. Value-added costs are the costs to perform value-added activities with perfect efficiency.

Non-value-added activities are necessary/unnecessary and are not valued/valued by internal or external customers. Non-value-added activities fail to produce a change in state or replicate work because it wasn’t done correctly the first time. State-detection activity is non-value-added because it is not a state-changing activity. State-correcting activity is non-value-added because it is doing something that should have been done by prior activities. Non-value-added costs are costs caused by non-value-added activities or by the inefficient performance of value-added activities. One of the goals of PVA is to identify non-value-added activities and then to eventually eliminate them so that costs are reduced.

A firm should identify and formally report the value- and non-value-added costs of each activity. Highlighting non-value-added costs reveals the magnitude of the waste the company is currently experiencing, thus providing some information about the potential for improvement. A cost report that shows value- and non-value-added costs allows managers to see the amount of waste, assess its materiality and identify opportunities for cost reduction.

Apply the Concepts

1. Select "Yes or No" for the following activities that are non-value-added:

Activities Yes or No
Recasting molds that fail inspection
Setting up equipment for a production run
Preparing a required report for the SEC
Inspecting incoming components
Expediting production
Purchasing parts for production
Storing goods for eventual sale
Unloading goods from suppliers
Reworking a defective unit
Performing warranty work
Welding subassemblies
Preparing a tax report for the IRS

2. There are four employees in the welding department. Three employees are responsible for welding a rod to a cylindrical plate, creating a sub assembly used in the production of pistons. The fourth employee inspects the completed sub assembly and, if necessary, grinds and removes any unnecessary bumps (protuberances) so that the sub assembly becomes usable (which occurs in approximately one-third of the cases because of less than efficient welding). The welders are each paid a salary of $50,000. The fourth employee, who is responsible for inspecting and grinding, is paid a salary of $40,000.

1. Calculate the following:

Value-added cost: $
Non-value-added cost: $

2. Answer the following:

The salary of the inspector-grinder is non-value-added/value-added because the activity involves the following. Select "Yes or No".

Activities Yes or No
State-creation
State-correction
State-detection
Externally mandated work
Necessary work to remain in business

b. All/some of the welding work is value-added because it is a state-correction/state-creation activity.

Apply the Concepts, Cost Reporting

Medco Inc., a manufacturing firm, has four activities: purchasing materials, molding, inspecting molds, and grinding imperfect molds. Purchasing materials and molding are necessary activities; inspection and grinding are unnecessary. SQ provides the value-added quantity for each activity; AQ is the actual activity output. The following data pertain to the four activities for the year ending (actual price per unit of the activity driver is assumed to be equal to the standard price):

Activity Activity Driver SQ AQ SP
Purchasing Purchasing hours 28,000 34,000 $20
Molding Molding hours 42,000 47,600 12
Inspecting Inspection hours 0 8,400 15
Grinding Number of units 0 6,000 6

Required:

1. Prepare a cost report for the year 1 ended that shows value-added costs, non-value-added costs, and total costs for each activity by completing the following table:

Value-and Non-Value-Added Cost Report for the Year 1 Ended
Activity Value-Added
Costs
Non-Value-Added Costs Total Costs
Purchasing $ $ $
Molding
Inspecting
Grinding
Total $ $ $

2. Inspection and grinding are non-value-added activities because inspection is a state-creation/state-correction/state-detection activity and grinding is a state-creation/state-correction/state-detection activity.

3. Purchasing is a step-fixed cost with each step being 2,000 hours. Suppose that the efficiency of purchasing is increased so that the demand for the purchasing activity is 31,000 hours. What is the reduction in the cost achieved by the increased efficiency?

Reduction: $

Solutions

Expert Solution

1. Select "Yes or No" for the following activities that are non-value-added:
Activities Yes or No
Recasting molds that fail inspection Yes
Setting up equipment for a production run YES
Preparing a required report for the SEC No
Inspecting incoming components YES
Expediting production Yes
Purchasing parts for production Yes
Storing goods for eventual sale YES
Unloading goods from suppliers YES
Reworking a defective unit Yes
Performing warranty work YES
Welding subassemblies No
Preparing a tax report for the IRS No
1. Calculate the following:
Value-added cost:(50000*3)+(2/3*40000) 176667
Non-value-added cost:(1/3*40000) 13333
2. Answer the following:
The salary of the inspector-grinder is non-value-added/value-added  because the activity involves the following. Select "Yes or No".
Activities
State-creation value-added
State-correction non-value-added
State-detection non-value-added
Externally mandated work value-added
Necessary work to remain in business value-added
b. Some of the welding work is value-added because it is a  state-creation activity.
1.Cost report for the year 1 ended that shows value-added costs, non-value-added costs, and total costs for each activity :
Value-and Non-Value-Added Cost Report for the Year 1 Ended
Activity Value-Added Costs Non-Value-Added Costs Total Costs
Purchasing 28000*20= 560000 (34000-28000)*20= 120000 680000
Molding 42000*12= 504000 (47600-42000)*12= 67200 571200
Inspecting 8400*15= 126000 126000
Grinding 6000*6= 36000 36000
Total 1064000 349200 1413200
2. Inspection and grinding are non-value-added activities because inspection is a state-detection  activity and grinding is a state-correction activity.
3. Purchasing is a step-fixed cost with each step being 2,000 hours. Suppose that the efficiency of purchasing is increased so that the demand for the purchasing activity is 31,000 hours. Reduction in the cost achieved by the increased efficiency=
Reduction: $   (31000-28000)*20=
60000

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