art of a just-in-time production system. All labor is considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume. Production costs for 100,000 units of the component are as follows: Direct Materials P300,000 Factory overhead: Indirect labor P 80,000 Supplies 30,000 Allocated occupancy cost 40,000 150,000 TOTAL COST P450,000
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.
Assume that a division of Sony makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just-in-time production system. All labor is considered to be an
|
Direct Materials |
|
P300,000 |
|
Factory overhead: |
|
|
|
Indirect labor |
P 80,000 |
|
|
Supplies |
30,000 |
|
|
Allocated occupancy cost |
40,000 |
150,000 |
|
TOTAL COST |
|
P450,000 |
A small, local company has offered to supply the components at a price of P3.45 each. If the division discontinued its production of the component, it would save two-thirds of the supplies cost and P30,000 of indirect labor cost. All other overhead costs would continue.
The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of P3.00 is below the P3.45 bid.
REQUIRED:
- Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much?
- What qualitative factors might influence the decision about whether to make or buy the component?
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