The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, is a component of the company’s finished product. The following information was collected from the accounting records and production data for the year ending December 31, 2020. 1. 8,000 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $5.23, direct labor $4.71, indirect labor $0.48, utilities $0.39. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $2,100 $960 Property taxes 500 370 Insurance 910 650 $3,510 $1,980 All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments. 4. The lowest quotation for 8,000 CISCO units from a supplier is $86,830. 5. If CISCO units are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,280 per year would be incurred by the Machining Department. (a) Prepare an incremental analysis for CISCO. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make CISCO Buy CISCO Net Income Increase (Decrease) Direct material $ $ $ Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight and inspection Receiving costs Total annual cost $ $ $ (b) Based on your analysis, what decision should management make? The company should buy CISCOmake CISCO . (c) Would the decision be different if Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO? No/Yes
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.
The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, is a component of the company’s finished product.
The following information was collected from the accounting records and production data for the year ending December 31, 2020.
1. 8,000 units of CISCO were produced in the Machining Department.
2. Variable
direct materials $5.23, direct labor $4.71, indirect labor $0.48, utilities $0.39.
3. Fixed manufacturing costs applicable to the production of CISCO were:
| Cost Item | Direct | Allocated | ||||
| $2,100 | $960 | |||||
| Property taxes | 500 | 370 | ||||
| Insurance | 910 | 650 | ||||
| $3,510 | $1,980 |
All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments.
4. The lowest quotation for 8,000 CISCO units from a supplier is $86,830.
5. If CISCO units are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,280 per year would be incurred by the Machining Department.
(a) Prepare an incremental analysis for CISCO. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
| Make CISCO | Buy CISCO | Net Income Increase (Decrease) |
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| Direct material | $
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$
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$
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| Direct labor |
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| Indirect labor |
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| Utilities |
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| Depreciation |
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| Property taxes |
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| Insurance |
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| Purchase price |
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| Freight and inspection |
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| Receiving costs |
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| Total annual cost | $
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$
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$
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(b) Based on your analysis, what decision should management make?
| The company should
buy CISCOmake CISCO
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(c) Would the decision be different if Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO?
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