Non Value Added Activities

Explain the concept of ‘’non-value-added activities’’ and give an example of such activities. Explain why a new product costing system might be required when a company fails to win a contract bid although the company might have set a low margin for the bid. When implementing ABC / ABM, explain how human behavior might affect its success or failure.

Non value added activities is some sort of activities that do not contribute to the product or the process and should therefore be eliminated. This activity mostly generates negative return on the investment of resources and usually can be eliminated without impairing a process. Others than that, it will increases the time spent on a product or service but does not increase the value of product or service to a customer. Examples of non-value-added activities include reworking goods, inspecting goods, and equipment maintenance. In addition, there are also five steps that provide a strategy for eliminating non value added costs. The first step is to identifying activities. Second, it will be identifying the non-value added activities. Third step is to understanding activity linkages, root causes and triggers. Fourth step is to establishing performance measures. Lastly will be reporting the non-value added costs. The non-value-added activities in addition to inefficient performance of value-added activities will cause non value-added costs.

Traditional costing system used by manufacturing companies to assign the overhead costs to units produced. In this system, accountant assigns manufacturing costs only to the products. Nonmanufacturing costs such as administrative expenses are failed to allocate by this costing system. With this reason, traditional costing system always reports an inaccurate product costs. Although this method is out-dated but this costing system is simple to use especially for those company that only produce one product.

         Activity based costing system (ABC) is a better and more accurate method of assigning the overhead costs to products. However, companies normally used it as a supplemental costing system. The allocation bases used in activity-based costing is different from traditional costing. The activity based costing system assigns cost first to the activities and processes that only cause the overhead. Unlike the traditional costing system that just assigns the cost based on the machine work hours. ABC only assigns those costs to the product that require to the activities.