A company manufactures automobile pistons. It estimates that in the next year it will produce 4,70,000 piston rings using 94 per cent of its production capacity. 8 rings are produced per machine hour. Contribution (selling price, less variable costs) per ring is Rs 5. The management is considering an option to produce jigs and fixtures using the surplus capacity. Jigs and fixtures are used to hold the ring during machine operations. On quality considerations, it will either produce all the 25 units of jigs and fixtures that it requires annually inhouse, or it will continue to buy those from outside. It estimates that next year buying jigs and fixtures will cost Rs 1,62,500 (Rs 6,500 per unit). The estimated costs for producing the jigs and fixtures are material and labour cost per unit: Rs 4,000; and additional fixed costs: Rs 25,000 per year. Production of each unit will require 200 machine hours. Required: Advise the management on whether it should produce jigs and fixtures in house. Support your advice with detailed calculation of economic outcome of the decision to produce jigs and fixtures inhouse and also qualitative considerations.
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.
A company manufactures automobile pistons. It estimates that in the next year it will produce 4,70,000 piston rings using 94 per cent of its production capacity. 8 rings are produced per machine hour. Contribution (selling price, less variable costs) per ring is Rs 5. The management is considering an option to produce jigs and fixtures using the surplus capacity. Jigs and fixtures are used to hold the ring during machine operations. On quality considerations, it will either produce all the 25 units of jigs and fixtures that it requires annually inhouse, or it will continue to buy those from outside. It estimates that next year buying jigs and fixtures will cost Rs 1,62,500 (Rs 6,500 per unit). The estimated costs for producing the jigs and fixtures are material and labour cost per unit: Rs 4,000; and additional fixed costs: Rs 25,000 per year. Production of each unit will require 200 machine hours.
Required:
Advise the management on whether it should produce jigs and fixtures in house. Support your advice with detailed calculation of economic outcome of the decision to produce jigs and fixtures inhouse and also qualitative considerations.
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