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CMA Intermediate · Management Accounting · Activity Based Costing

In Activity Based Management (ABM), activities are classified as value-added or non-value-added from the customer's viewpoint. Which of the following activities at a Pune engineering firm would normally be classed as non-value-added?

Moving work-in-process between distant workstations is non-value-added, because it uses resources without adding anything the customer values and can be cut by better layout. Machining, assembly and painting to the customer's specification all change the product in ways the customer pays for, so they are value-added.

  1. AMachining a component to the customer's specification
  2. BAssembling the finished product
  3. CMoving work-in-process between two distant workstations on the shop floorCorrect
  4. DFinal painting of the product as specified in the customer order

Explanation

A non-value-added activity consumes resources but does not increase the product's worth to the customer. Internal material movement caused by poor layout is such an activity and can be reduced or eliminated. Machining, assembly and painting directly change the product to meet the customer's requirements, so they are value-added.

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