BU247 Chapter Notes - Chapter 3: Outsourcing

29 views1 pages
25 Jan 2013
School
Department
Course
Professor
BU247 Chapter 3 Using Costs in Decision Making continued Week 3
Make-or-buy The Outsourcing Decision
-Deciding whether to contract out for a product or service is known as the make-or-buy decision
-The costs that should be considered:
Internal costs avoided
External costs incurred
-All variable costs
-Any avoidable fixed costs such as the cost of
supervisory personnel who would be laid off or
machinery that would be sold
-The cost of purchasing the part
-Any transportation costs
-Any other costs involved in dealing with the
outside supplier, ordering the product, and
receiving and inspecting it
Manufacturing Costs
-Manufacturing costs are classified into three groups: direct materials, direct labour, and manufacturing
overhead
-Direct materials include materials that can be traced easily to a unit of output and are of significant
economic consequence to the final product
-Direct labor costs are those labour costs that can be traced easily to the creation of a unit of output
-Manufacturing overhead costs are all costs incurred by a manufacturing facility that are not direct
materials costs or direct labor costs
The Decision to Drop a Product
-Organizations abandon a product when it is unprofitable either because revenues no longer exceed
costs or because another organization offers to buy the rights to the product at a favourable price
-Because the focus is on product profitability, the relevant cost analysis involves comparing the costs
saved by abandoning the product with the revenues forgone
Costing Orders
-The order costing problem deals with estimating the cost of unique orders
-Computing the floor price, or the minimum price that a company would normally consider for the
order, exploits the relevant cost idea by considering the costs that will change as a result of taking the
order
Relevant Cost and Short-term Product Mix Decisions
-Organizations like machine shops and consultancies often ace competing demands for their limited
production resources
-Choices have to be made among the various opportunities that present themselves
Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Chapter 3 using costs in decision making continued. Deciding whether to contract out for a product or service is known as the make-or-buy decision. Any avoidable fixed costs such as the cost of supervisory personnel who would be laid off or machinery that would be sold. Any other costs involved in dealing with the outside supplier, ordering the product, and receiving and inspecting it. Manufacturing costs are classified into three groups: direct materials, direct labour, and manufacturing overhead. Direct materials include materials that can be traced easily to a unit of output and are of significant economic consequence to the final product. Direct labor costs are those labour costs that can be traced easily to the creation of a unit of output. Manufacturing overhead costs are all costs incurred by a manufacturing facility that are not direct materials costs or direct labor costs.

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes