The Cost of Non-value-added Activities

Activity Based Costing
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The Cost of Non-value-added Activities

Why do non-value activities cause costs to increase unnecessarily?

  Joseph
 

Non-value Adding Activities

The more non-value adding activities you do, the more costs you will incur. Since your activities are not adding any value, this cost increase is unnecessary.

  Kasaw
Ethiopia
 

Non Value Added Activities in ABC

Non value added activities are those which are present in the process of production of goods or services with little importance or advantage. If they're identified and removed, no change in output will occur, but the cost will decrease significantly.

  Sudesh Bhikha
Entrepreneur, United States
 

Non Value Cost and Cash Flow

Non-value added steps like transportation and storage of work in process (WIP) have serious cash flow impacts, because they increase cycle time and also they decrease quality.
For example, if a product takes two days of manufacturing time, but the cycle time is 10 days, you will get approx. 3 turns of product per month. If you reduce the non value days by 5 days to 5 days, your product turnover is now 6 times per month.
The 5 non-value days that were removed were tying up 15 days of cash per month. Additionally, if there is a quality issue, you can detect it 50% faster by going from 10 days to 5 days cycle time.
The other factor to consider is that storage space also costs money because it has expenses associated with it, like depreciation, utilities etc.
By removing non value-added steps you can get increased production from less space, improving your bottom line in the P&L.
The same logic applies to non-production processes like back office processes.

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