16,000 Units Direct Materials 12 192,000.00 Direct Labor 8 128,000.00 Variable overheads 2 32,000.00 Supervisor's Salary 6 96,000.00 Depreciation of Special Equipment 4 64,000.00 Allocated General overhead 10 160,000.00 Total Cost 42 672,000.00 An outside supplier has offered to sell 16,000 wheels a year to Toronto Cycles for a price of $38 each, or a total of $608,000 (= 16,000 wheels × $38 each). Special equipment’s used in production was bought 5 years back and do not have any resale value now. The supervisor is specifically hired to supervise the production of wheels, thus is relevant and avoidable if wheels are bought from outside. Requirement: Should the company stop producing the wheels internally and buy them from the outside supplier?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
16,000 Units
Direct Materials 12 192,000.00
Direct Labor 8 128,000.00
Variable
Supervisor's Salary 6 96,000.00
Equipment 4 64,000.00
Allocated General overhead 10 160,000.00
Total Cost 42 672,000.00
An outside supplier has offered to sell 16,000 wheels a year to Toronto Cycles for a price of $38 each, or a total of $608,000 (= 16,000 wheels × $38 each).
Special equipment’s used in production was bought 5 years back and do not have any resale value now.
The supervisor is specifically hired to supervise the production of wheels, thus is relevant and avoidable if wheels are bought from outside.
Requirement:
Should the company stop producing the wheels internally and buy them from the outside supplier?
Hints and Reference:
Lecture and reading material of Buy and Make Decision and Utilization of Constrained
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