What is a Non-Value Added Cost?

//What is a Non-Value Added Cost?
What is a Non-Value Added Cost? 2017-10-06T02:13:55+00:00

Definition: A non-value added cost is a production expense that does not increase the amount customers are willing to pay for the finished product. It does not make the product any more appealing to customers and they would not pay any more money for the product because the cost is incurred.

What Does Non-Value Added Cost Mean?

What is the definition of non-value added cost? Non-value adding costs are a necessary step in product development and product enhancement, even though it does not have added benefit in the customer’s eyes. Fixing faulty products or unappealing product packaging are essential in keeping business, but they do not add value to the product. Patents are another non value adding cost. They do not increase the value of the product to customers, but are important because it allows a company to be the sole owner of a product idea or development. Many companies look for ways to decrease the amount of non value adding costs because they create more expense and do not add to the total profit of the company.

Here is an example.

Example

Riley is the CEO of a laptop computer manufacturing company called Laptopz. During the transport of these computers from the factory to retailers the boxes crumpled and scratched numerous computers making them unsellable at the full reta price. Riley decided that the packaging of the computers needed to be made sturdier so there would not be this issue anymore. Laptopz spent $25,000 on new packaging for the laptop computers. Customers do not care about the packaging of these computers and would not pay any more money because they are in different packaging so this would be a non- value added cost.

Laptopz also has 1,000 laptops in storage right now because they overproduced a certain type of laptop because of a miscommunication between a customers. The laptops that are in storage are unused inventory which does not add any value to the laptops, but increases the cost. So this would also be considered a non value adding cost. To decrease the amount of non value adding costs, Riley would need to find a way to sell the inventory that is in storage as well as make sure that the new packaging will hold up in transport.

Summary Definition

Define Non Value Added Costs: Non-value adding costs are production expenditures that don’t make the product better or more desirable to customers.