Non-Value-Added Costs Occur in Nonmanufacturing Organizations as Well as in Manufacturing

question 40

Essay

Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms.
Required:
A. Explain what is meant by a non-value-added cost.
A. Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. These activities should be eliminated to save time and money. General examples include the costs of inspection, moving, waiting, and storing.
B. Airlines:
• Vouchers for future flights that are given to passengers as a result of poor customer service.
• The cost of tracing, returning, repairing, or replacing lost or mishandled luggage.
• Additional compensation paid to flight crews attributable to cancellations or delays from problems that should have been prevented by routine maintenance.
Banks:
• The cost of correcting bank errors in customer accounts.
• The cost of performing manual banking procedures necessitated by computer system downtime.
• Losses caused by employee embezzlement and petty thefts.
• Defaulted loans made to borrowers who should have been classified as poor risks by existing credit-granting procedures.
Hotels:
• Broken dishes and glassware, loss of or damage to linens and towels.
• The cost of replacing lost room keys/entry cards.
• The cost of overstaffing the front desk during nonpeak hours.
• Excess food costs, including preparation.
B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

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Definitions:

Electric Company

A utility company that generates, transmits, and distributes electricity to consumers and businesses.

Tragedy of the Commons

A situation in which individual users of a shared resource act in their own interest, depleting or degrading the common resource.

Negative Externality

A cost suffered by a third party as a consequence of an economic transaction in which they were not involved.

Common Resource

A resource like air or water, that provides users with tangible benefits but is difficult to exclude nonpaying users from consuming or depleting.