Powell Dentistry Services operates in a large metropolitan area. Currently, Powell has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows: Porcelain Gold Direct materials $ 80 $165 Direct labor 27 27 Variable overhead 8 8 Fixed overhead 22 22 Total $137 $222 Fixed overhead is detailed as follows: Salary (supervisor) $26,000 Depreciation 5,000 Rent (lab facility) 32,000 Overhead is applied on the basis of direct labor hours. These rates were computed using 5,500 direct labor hours. A local dental laboratory has offered to supply Powell all the crowns it needs. Its price is $130 for porcelain crowns and $200 for gold crowns; however, the offer is conditional on supplying both types of crowns—it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Powell’s labora- tory would be scrapped (it is old and has no market value), and the lab facility would be closed. Powell uses 3,000 porcelain crowns and 800 gold crowns per year. Required 1. Should Powell continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing? 2. What qualitative factors should Powell consider in making this decision? 3. Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? 4. Refer to the original data. Assume that the volume of crowns used is 4,000 porce- lain and 600 gold. Should Powell make or buy the crowns? Explain the outcome.
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.
Powell Dentistry Services operates in a large metropolitan area. Currently, Powell has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:
Porcelain Gold
| Direct materials | $ 80 | $165 |
| Direct labor | 27 | 27 |
| Variable overhead | 8 | 8 |
| Fixed overhead | 22 | 22 |
| Total | $137 | $222 |
Fixed overhead is detailed as follows:
| Salary (supervisor) | $26,000 |
| Depreciation | 5,000 |
| Rent (lab facility) | 32,000 |
Overhead is applied on the basis of direct labor hours. These rates were computed using 5,500 direct labor hours.
A local dental laboratory has offered to supply Powell all the crowns it needs. Its price is $130 for porcelain crowns and $200 for gold crowns; however, the offer is conditional on supplying both types of crowns—it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Powell’s labora- tory would be scrapped (it is old and has no market value), and the lab facility would be closed. Powell uses 3,000 porcelain crowns and 800 gold crowns per year.
Required
1. Should Powell continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing?
2. What qualitative factors should Powell consider in making this decision?
3. Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?
4. Refer to the original data. Assume that the volume of crowns used is 4,000 porce- lain and 600 gold. Should Powell make or buy the crowns? Explain the outcome.
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