Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company.
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.
Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,200 units of the part that are needed every year.
| Per Unit | ||
| Direct materials | $ | 7.60 |
| Direct labor | $ | 4.30 |
| Variable |
$ | 8.50 |
| Supervisor's salary | $ | 3.30 |
| $ | 2.80 | |
| Allocated general overhead | $ | 1.50 |
An outside supplier has offered to make the part and sell it to the company for $28.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,600 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $17,800 per year for that product.
Required:
a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
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