Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Total Cost Unit Cost Direct materials $25,000 $5.00 Direct labor 15,000 3.00 Variable manufacturing overhead 7,500 1.50 Variable marketing overhead 10,500 2.10 Fixed plant overhead 30,000 6.00 Total $88,000 $17.60 Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number. Required: 1. What are the alternatives for Fresh Foods? 2. List the relevant cost(s) of internal production and of external purchase. 3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) 4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
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.
Structuring a Make-or-Buy Problem
Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:
| Total Cost | Unit Cost | ||
| Direct materials | $25,000 | $5.00 | |
| Direct labor | 15,000 | 3.00 | |
| Variable manufacturing |
7,500 | 1.50 | |
| Variable marketing overhead | 10,500 | 2.10 | |
| Fixed plant overhead | 30,000 | 6.00 | |
| Total | $88,000 | $17.60 |
Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.
Required:
1. What are the alternatives for Fresh Foods?
2. List the relevant cost(s) of internal production and of external purchase.
3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
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