Hemple produces a variety of pocket PCs. Due to competitive pressures, the company is implementing an activity-based management (ABM) system with the objective of reducing costs. ABM focuses attention on processes and activities. Inspecting incoming goods was among the processes (activities) that were carefully studied. The study revealed that the number of inspection hours was a good driver for inspecting goods. During last year, the company incurred fixed inspection costs of $400,000 (salaries of 10 employees). The fixed costs provide a capacity of 20,000 hours (2,000 per employee at practical capacity).

Management decided that inspecting incoming goods is a non-value-added activity. The number of actual inspection hours used in the most recent period was 18,000.

Required:

1. Calculate the volume and unused capacity variances for inspecting. Explain what each variance means.

2. Prepare a report that presents value-added, non-value-added, and actual costs for inspecting. Explain why highlighting the non-value-added costs is important.

3. Explain why inspecting should be viewed as a non-value-added activity. In providing your explanation, consider the following counterargument: “Inspecting incoming goods adds value because it reduces the demand for other unnecessary activities such as rework, reordering, and warranty work.”

4. Assume that management is able to reduce the demand for the inspecting activity so that the actual hours needed drop from 18,000 to 9,000. What actions should now be taken regarding activity capacity management?