Question: Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing. The following information is available for the company's three cost pools:
Activity
|
Cost Driver
|
Cost-Driver Quantity
|
Percent of Cost-
Driver Activity for
Bookstore Transactions
|
Percent of Cost- Driver Activity for Transactions to Individuals
|
|
Incoming receipts
|
Number of
purchase orders
|
3,000
|
20%
|
80%
|
|
|
|
|
|
|
|
Warehousing
|
Number of inventory moves
|
8,000
|
60
|
40
|
|
|
|
|
|
|
|
Outgoing shipments
|
Number of shipments
|
18,000
|
30
|
70
|
Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.
Required to do:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Switzer this past year?
C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Ignore costs that arose from inefficient operations.