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Short-term Decision making – Make or Buy decisions – ACCA Performance Management (PM)

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  1. Hi John

    to make
    Y kg = 2500 x 2kg = 5000 (I understand this)
    Z kg = 3000 x 1kg = 3000 (I understand this)

    to buy
    Z kg = 1000 x 1 kg = 1000 (I understand this)
    X kg = 2000 x 3 kg = 6000 – why do you say only 2000? Why not 6000?

  2. Hi Sir,
    To get the savings per unit of making as I understand is the difference between variable cost of making and buying cost. What if there was specific fixed cost that is only incurred from the one off project, should we include this?

      • That depends on whether all of the product is being bought externally or whether some of them are still being made in-house. If you are having a problem with a specific question then say which question and I will explain (but ask in the Ask the Tutor Forum and not here).

      • Yes this is the case. Some are being bought externally and some are made in house. I can鈥檛 seem to find the question sorry.

      • In that case the specific fixed costs will be incurred regardless of how many are bought externally. They will not be saving the fixed cost.

  3. Question 4
    Direct Products Ltd manufactures and sells four products, A, B, C and D. Due to a limit on the
    labour capacity of 1,200 direct hours in the next period the company considers it will not be
    able to meet its anticipated sales demand and is therefore considering buying in some units
    from an outside supplier to make up any shortfall. There is no finished goods stock. The
    following budgeted information has been provided for the next period.
    A B C D
    Sales demand (units) 600 200 300 200
    Selling price per unit RM25 RM40 RM30 RM50
    Direct material (per unit) RM2 RM4 RM3 RM4
    Direct labour hours (per unit) 1 1.5 1 2
    Direct labour is budgeted at RM10 per direct labour hour.
    Variable overheads are budgeted at RM2 per direct labour hour.
    Fixed production overheads absorbed at a rate of RM8.00 per unit produced are expected to be
    RM10,400.
    An outside supplier has quoted RM19, RM28, RM21 and RM37 per unit respectively for
    products A, B, C and D.
    Required
    (a) Advise the company on which products, and how many, it should buy in order to achieve
    the budgeted output at minimum cost. Support your advice with calculations.
    (b) Produce a budgeted manufacturing and trading account for the period.

    May i know (a) is using make/buy in problems and limiting factors?
    How about (b)?

    • You must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
      Given that you must have an answer in the same book in which you found the question, when you do ask in the Ask the Tutor Forum then ask about whatever it is in the answer that you are not clear about and then I will explain.
      As far as part (b) is concerned, you cannot be asked to prepare a manufacturing and trading account in Paper PM 馃檪

  5. Hello Mr. John, thanks for the lecture on Make and Buy decisions. I have a query w.r.t. to comparison of Specific Fixed Cost saving that we need to take under consideration.

    In case we have already established savings per limiting factor for making the product in-house, will we consider the specific fixed cost savings that also play its part in deciding the outsourcing decision? As in, if we may save 2 per unit for 2000 units, so saving is +4000 but the specific fixed costs can be -5000 for making it in house.

    For a line of products being questioned with limiting factor, do we have to consider specific FC as well? If mentioned.

    • Hi, first and foremost i acknowledge that the Question was not directed to me, i feel i can respond a bit.

      With the Lecture the tutor said that lets presume the products can be sold at a price that can meet the costs both for in house production and buy the already produced Goods. the other thing you may need to understand is we are dealing Variable cost here and not the selling price, as may be reminded that the purchase price is aa variable cost.

      Hoping i was of great help?

  8. Hi,

    Thank you very much John. I am so sorry but I did not understand in the example 2, in the note 3, why do we ignore general overheads of $3,000. Could you please explain one more time here.

    Many thanks in advance

    • Because the 3,000 is just an apportionment of existing overheads – that means that whatever the existing total overheads are, then have been shared between projects for accounting purposes. With or without the new contract, the total overheads will stay the same (we will just share them differently) and therefore there is no extra cost involved.

  10. Sir,

    Just would like to confirm my understanding from video, Assume that can be sold for more than both our coast of making and the cost of buying them.
    Says that X product buy from others, $13 per unit, if we can sell $12 outside, better going not to do.
    Is it correct?
    Thanks.
    May.

  11. Thanks John. Well understood Sir. This is a make or buy with a limiting factor and so the best course of action as you explained is to simply find the saving per unit of the scarce resource for each product and rank in that order. Once that has been established then we can allocate the limited resource . Any unsatisfied demand can be met by buying from the outside supplier.

    Actually it is economical to make all three products in-house as the variable cost to make is less than the buy in price. But due to the limited kg of material B we can make all of Y (2,500 units), but only 3000 units of Z instead of 4,000 units using the balance kgs of material B after making Y. The balance 1,000 units (4,000-3,000) of Z can be satisfied from the outside supplier. Likewise the demand for X of 2,000 units can be satisfied from buying in. However, the cheapest per kg to buy in is Product X, next Z and finally Y (but we are already fine with Y).

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