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Chapter 12: Problem 8

Give two examples of a value-added cost and two examples of a nonvalue-added cost.

Short Answer

Expert verified
Value-added costs: direct materials, labor. Nonvalue-added costs: lighting, rework.

Step by step solution

01

Understand Value-Added Costs

Value-added costs are expenses that directly contribute to the production of goods or services, and enhance the value of the product to the customer. Examples of value-added costs include direct materials and direct labor that are integral to producing a finished product.
02

Identify Two Value-Added Costs

An example of a value-added cost is the raw materials used in manufacturing a car, such as steel or aluminum. Another example is the wages paid to workers who assemble the car, as their labor is essential to creating the finished product.
03

Understand Nonvalue-Added Costs

Nonvalue-added costs are expenses that do not contribute directly to the final product or service and do not enhance its value to the customer. Often, these costs are necessary but should be minimized or eliminated to improve efficiency.
04

Identify Two Nonvalue-Added Costs

An example of a nonvalue-added cost is the electricity used to light the warehouse, as it does not directly impact the creation of the product. Another example is the cost of rework due to defects, which adds no value to the final product and often is seen as an avoidable expense.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Value-Added Costs
In cost accounting, value-added costs refer to those expenses that are essential in the creation of a product or service. These costs directly enhance the product, making it more valuable to the customer. When you think about value-added costs, consider the elements that directly impact production and are intrinsic to the finished product.

For instance:
  • Direct materials - These are the raw materials used in manufacturing, like steel for cars or flour for bread.
  • Direct labor - This is the work performed by employees, such as assembly line workers, which is necessary to produce the product.
Without these costs and activities, the product wouldn't exist in its finished form. To sum up, value-added costs are crucial because they transform materials and efforts into something a customer can buy and use.
Nonvalue-Added Costs
Nonvalue-added costs are those expenses that do not increase the value of a product from the customer's perspective. These are often seen as inefficiencies in the production process. While some nonvalue-added costs may be unavoidable, businesses should strive to decrease them wherever possible.

Some examples include:
  • Electricity in warehouses - While necessary for operations, it doesn't directly contribute to product creation.
  • Rework costs - Any additional costs incurred from correcting defects don't add value to the final product. They can occur due to mistakes during production, requiring extra resources to fix.
By minimizing nonvalue-added costs, companies can improve production efficiency and reduce unnecessary expenditures.
Direct Materials
Direct materials are the building blocks of a product. They are tangible components that become a part of the finished item. An important characteristic of direct materials is that their costs can be directly traced back to a single product.

Consider these examples:
  • Wood for making furniture.
  • Fabric used in garment production.
In cost accounting, tracking direct materials is crucial because it helps businesses determine the exact cost of producing each product. It allows for more accurate pricing strategies and financial planning, ultimately aiding in controlling overall manufacturing costs.
Direct Labor
Direct labor consists of the workforce efforts that can be directly attributed to producing a specific product or service. This includes hands-on work performed by employees, such as assembly, crafting, and machining.

Some practical illustrations of direct labor are:
  • Sewers assembling pieces in a textile factory.
  • Technicians building electronic gadgets.
Direct labor not only includes the wages paid to workers but also benefits associated with their employment. Measuring direct labor costs is important for understanding the cost structure of a product and helps in identifying areas for efficiency improvement.

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Most popular questions from this chapter

The following financial data apply to the DVD production plant of the Dill Company for October 2011 : Variable manufacturing overhead varies with the number of DVD packs produced. Fixed manufacturing overhead of \(\$ 1\) per pack is based on budgeted fixed manufacturing overhead of \(\$ 150,000\) per month and budgeted production of 150,000 packs per month. The Dill Company sells each pack for \(\$ 5\) Marketing costs have two components: \(\bullet\)Variable marketing costs (sales commissions) of \(5 \%\) of revenues \(\bullet\)Fixed monthly costs of \(\$ 65,000\) During 0ctober \(2011,\) Lyn Randell, a Dill Company salesperson, asked the president for permission to sell 1,000 packs at \(\$ 4.00\) per pack to a customer not in Dill's normal marketing channels. The president refused this special order because the selling price was below the total budgeted manufacturing cost. 1\. What would have been the effect on monthly operating income of accepting the special order? 2\. Comment on the president's "below manufacturing costs" reasoning for rejecting the special order. 3\. What other factors should the president consider before accepting or rejecting the special order?

Describe value engineering and its role in target costing.

What are the three major influences on pricing decisions?

Apex Art has been requested to prepare a bid on 500 pieces of framed artwork for a new hotel. Winning the bid would be a big boost for sales representative Jason Grant, who works entirely on commission. Sonja Gomes, the cost accountant for Apex, prepares the bid based on the following cost information: Based on the company policy of pricing at \(125 \%\) of full cost, Gomes gives Grant a figure of \(\$ 151,250\) to submit for the job. Grant is very concerned. He tells Gomes that at that price, Apex has no chance of winning the job. He confides in her that he spent \(\$ 500\) of company funds to take the hotel's purchasing agent to a basketball playoff game where the purchasing agent disclosed that a bid of \(\$ 145,000\) would win the job. He hadn't planned to tell Gomes because he was confident that the bid she developed would be below that amount. Gomes reasons that the \(\$ 500\) he spent will be wasted if Apex doesn't capitalize on this valuable information. In any case, the company will still make money if it wins the bid at \(\$ 145,000\) because it is higher than the full cost of \(\$ 121,000\) 1\. Is the \(\$ 500\) spent on the basketball tickets relevant to the bid decision? Why or why not? 2\. Gomes suggests that if Grant is willing to use cheaper materials for the frame, he can achieve a bid of \(\$ 145,000 .\) The artwork has already been selected and cannot be changed, so the entire amount of reduction in cost will need to come from framing materials. What is the target cost of framing materials that will allow Grant to submit a bid of \(\$ 145\) assuming a target markup of \(25 \%\) of full cost? 3\. Evaluate whether Gomes' suggestion to Grant to use the purchasing agent's tip is unethical. Would it be unethical for Grant to redo the project's design to arrive at a lower bid? What steps should Grant and Gomes take to resolve this situation?

The Marino Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2011 is as follows: a. Materials and labor for servicing machine tools \(\quad \$ 800,000\) b. Rework costs 75,000 c. Expediting costs caused by work delays 60,000 d. Materials-handling costs 50,000 e. Materials-procurement and inspection costs 35,000 f. Preventive maintenance of equipment 15,000 g. Breakdown maintenance of equipment 55,000 1\. Classify each cost as value-added, nonvalue-added, or in the gray area between. 2\. For any cost classified in the gray area, assume \(65 \%\) is value-added and \(35 \%\) is nonvalue-added. How much of the total of all seven costs is value-added and how much is nonvalue-added? 3\. Marino is considering the following changes: (a) introducing quality- improvement programs whose net effect will be to reduce rework and expediting costs by \(75 \%\) and materials and labor costs for servicing machine tools by \(5 \%\); (b) working with suppliers to reduce materials-procurement and inspection costs by \(20 \%\) and materials-handling costs by \(25 \%\); and (c) increasing preventive-maintenance costs by \(50 \%\) to reduce breakdown- maintenance costs by \(40 \%\). Calculate the effect of programs (a), (b), and (c) on value-added costs, nonvalue-added costs, and total costs. Comment briefly.
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