Company A has to decide whether to manufacture Product X internally or to buy from outsiders at Rs.11. The annual demand for product X is 10,000. The details of Company A internal production costs are as follows: Rs. per unit Direct material 2.00 Direct labor 3.00 Variable production overhead 0.50 Fixed production overhead (2 hours x 0.25 per hour) 0.50 Fixed production overhead is calculated on the basis of 200,000 direct labor hours. 60% of fixed overhead is eliminated if the company purchases from an outsider. The company can produce 20,000 units of product Y if product X would be purchase from an outsider and earned a contribution of Rs. 8 per unit. The company also rent their premises portion to other company at an annual rental of Rs.30,000 Required: Should Company manufacture product X internally or buy from an 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.
Company A has to decide whether to manufacture Product X internally or to buy from outsiders at Rs.11. The annual demand for product X is 10,000.
The details of Company A internal production costs are as follows:
| Rs. per unit | |
| Direct material | 2.00 |
| Direct labor | 3.00 |
Variable production
Fixed production overhead (2 hours x 0.25 per hour) 0.50
Fixed production overhead is calculated on the basis of 200,000 direct labor hours. 60% of fixed overhead is eliminated if the company purchases from an outsider. The company can produce 20,000 units of product Y if product X would be purchase from an outsider and earned a contribution of Rs. 8 per unit. The company also rent their premises portion to other company at an annual rental of Rs.30,000
Required:
Should Company manufacture product X internally or buy from an outside supplier?
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