Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 3

Why is it important for managers to assess whether activities are value-added or nonvalue-added? What are some common nonvalue-added activities found in many businesses?

Step 1 of 2

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Value added activity

These are part of manufacturing activity that increases the worth of a product or part of activity performed to deliver the services and increases the value of service. It involves consumption of resources which increases cost and customer is willing to pay for that additional cost. Examples includes additional packing done, features added to product, more refinement done to product like oil etc.

Nonvalue-added activity

These are not part of production or services related activities and increases the cost and time period to manufacture or deliver a product or service without doing any enhancement in its market value. It involves activities like, repairs or servicing of machines, waiting time for raw materials or labors, inventory storage, inspection or quality checking etc.