During a recent accounting period, Marty's shipping department processed 26 orders. Each order typically takes four hours to complete; however, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company's non-value-added cost would be:
a.$0
b.$56
c.$364
d.$1,456
e.$1,820

The answer is $364 (c.)

Explanation:

Non-value-added costs are extra costs incurred in the creation of a product that does not add to the value of the product and the consumers are not willing to pay for. In this example, the effective time for completing an order when functioning at maximum efficiency is 4 hours and the workers are paid $14 per hour, so the total money paid at this 4 hour period is called the value-added cost. Moreover, due to inefficiency, the time for completing an order increased to 5 hours.

Now, let us calculate the total amount spent on completing an order when one order takes 5 hours. This is done thus:

amount paid per hour × hours worked for one order × number of orders

14 × 5 × 26 = $1820. Therefore, $1820 is the total cost incurred to complete 26 orders when they were not functioning at maximum efficiency.

Next, let us calculate the total cost incurred when they functioned efficiently, and it is calculated thus:

amount paid per hour × hours worked for one order × number of orders

= 14 × 4 × 26 = $1456. This is the value-added cost.

Finally, to calculate the non-value-added cost, we will subtract the value added cost from the total cost when extra cost due to inefficiency was added.

∴ non-value-added cost = 1820 - 1456 = $364