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.B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.
What will be an ideal response?
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 |
| • | The cost of tracing, returning, repairing, or replacing lost or mishandled luggage. |
| • | Additional compensation paid to flight crews attributable to cancellations or delays |
Banks:
| • | The cost of correcting bank errors in customer accounts. |
| • | The cost of performing manual banking procedures necessitated by computer system |
| • | Losses caused by employee embezzlement and petty thefts. |
| • | Defaulted loans made to borrowers who should have been classified as poor risks by |
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. |
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