Royal Company manufactures 24,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows: per unit Direct materials ........................................................................ $ 14.40 Direct labour............................................................................. 21.00 Variable manufacturing overhead ........................................... 9.60 Fixed manufacturing overhead ................................................ 25.00 Total cost per part .................................................................... $ 70.00 An outside supplier has offered to sell 24,000 units of Part R-3 each year to Royal Company for $59 per part. However, Royal Company has determined that $15 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier. Requirements: 1. Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside supplier’s offer be accepted? Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted. Show all computations. {Hint: To simply and organize in an efficient manner, use a table to analyze your decision similar to the make vs buy tables in Module 14, Chapter 10, page 526 of the textbook., being sure to include all of the relevant costs from this particular decision.} 2. Building upon your analysis in Requirement 1, suppose that if Part R-3 were purchased, the facilities now being used to manufacture Part R-3 could be rented to another company at an annual rental of $150,000. Based on this new opportunity, should Royal Company accept the offer to buy Part R-3 from the outside supplier for $59 each? Why or why not, explain briefly. How much is the total savings of your chosen de cision to make or buy Part R-3 for the year under this new scenario? Show all computations. {Hint: The new product line represents a potential “opportunity” for the company, and should be considered an opportunity cost/benefit. Also note that it is easier to analyze this particular decision based on total costs, not per unit costs, since the new product information is given in total and units are not provided for the new product. As above, be sure to present your information in a clear, easy to read, understandable table.}
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.
Royal Company manufactures 24,000 units of Part R-3 each year. At this level of activity, the cost per
unit for Part R-3 follows:
per unit
Direct materials ........................................................................ $ 14.40
Direct labour............................................................................. 21.00
Variable manufacturing overhead ........................................... 9.60
Fixed manufacturing overhead ................................................ 25.00
Total cost per part .................................................................... $ 70.00
An outside supplier has offered to sell 24,000 units of Part R-3 each year to Royal Company for $59 per part. However, Royal Company has determined that $15 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier.
Requirements:
1. Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside supplier’s offer be accepted? Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted. Show all computations. {Hint: To simply and organize in an efficient manner, use a table to analyze your decision similar to the make vs buy tables in Module 14, Chapter 10, page 526 of the textbook., being sure to include all of the relevant costs from this particular decision.}
2. Building upon your analysis in Requirement 1, suppose that if Part R-3 were purchased, the
facilities now being used to manufacture Part R-3 could be rented to another company at an
annual rental of $150,000. Based on this new opportunity, should Royal Company accept the offer to buy Part R-3 from the outside supplier for $59 each? Why or why not, explain briefly. How much is the total savings of your chosen de cision to make or buy Part R-3 for the year under this new scenario? Show all computations. {Hint: The new product line represents a potential “opportunity” for the company, and should be considered an opportunity cost/benefit. Also note that it is easier to analyze this particular decision based on total costs, not per unit costs, since the new product information is given in total and units are not provided for the new product. As above, be sure to present your information in a clear, easy to read, understandable table.}
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