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ACCA Strategic Professional · Advanced Performance Management · Performance improvement models and techniques

Kestrel Retail's activity-based management review of its returns-handling activity finds that the activity consumes significant resources, but customers do not value it and it adds nothing to the product's features. Under activity-based management, how should this activity be classified and treated?

The activity is non-value-adding because customers do not value it and it adds nothing to the product. Activity-based management therefore targets it for reduction or elimination, since cost reduction there does not harm customer value, unlike cutting value-adding activities.

  1. AValue-adding; it should be maintained and benchmarked
  2. BNon-value-adding; management should seek to reduce or eliminate itCorrect
  3. CValue-adding; it should be outsourced to cut unit costs
  4. DNon-value-adding; it should be reclassified as overhead and absorbed on direct labour hours

Explanation

ABM distinguishes value-added activities, which customers will pay for, from non-value-added ones, which they will not. Non-value-added activities such as rework, inspection or returns handling are targeted for reduction or elimination. Reallocating them to a labour-hour overhead rate hides the cost rather than managing it.

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