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In a make or buy decisions with a limiting factor, why do we only compare the VC of making with the purchase price and we exclude any save in fixed costs?
They would be avoidable costs and thus a relevant cost for the decision.Please clarify this!
We don’t exclude any saving in fixed costs, and I do not know why you should suggest that we do!
In june 2012, robber co, for part (b), only variable cost of making was being compared with purchase price. Specific FC were excluded. Why so?
They would be avoidable costs if we outsource.But what you have written is simply not true!!!
In the first method in the examiners answer, the specific fixed costs of making them in-house have been included in the total cost of making them in-house. They have not been included in the cost of buying externally (because they will not be incurred). The two totals have been compared.
In the alternative method (either is valid for the marks), again avoidable fixed costs have been specifically dealt with.
Did you attempt this question yourself before looking at the answer?
Sir, I had understood that Part A of the question (means the Robber Co is currently manufacturing the production, hence, those avoidable/ specific fixed cost are included)
Wheres, the Part B says that Robber Co (wishes to increase), means it haven’t incur, so specific/ avoidable cost are excluded (Am I right in my first understanding Sir)
Sir, besides,
For Note 3, the statement had stated clearly that the heat and power/ fixed cost,
it is incurred irrespective of whether the components are manufactured in house or not.For Note 4, the fixed cost haven’t incur, so not included in the variable cost
For Note 5 of Specific Fixed Cost,
Attributable fixed costs are fixed costs that only occur is the particular process or production takes place.In conclusion, Total fixed cost irrespective of incur or not, it is irrelevant to the production unit, because regardless of the total units of 1 unit or 10 unit, it would still be the same,
If the question did not give assumption, can I exclude fixed cost from the VC of internal manufacturing vs VC of outsourcing (if the manufacturing haven’t happen)?
Part A is asking whether it is cheaper to manufacture the components or to buy them externally. Those costs that will be incurred whichever they do (such as part of the heat and power costs) are irrelevant to the decision. The relevant costs are those that will not be incurred if they do not manufacture themselves (i.e. the variable costs and the avoidable fixed costs).
For part B, we know from part A that it is cheaper to manufacture the components themselves. However they do not have sufficient labour available to increase the supply to 100,000. It therefore becomes an exercise of key factor analysis to decide whether it is better to use the labour producing keypads or display screens. Given that they will be producing some of both whatever happens, the fixed costs will be incurred anyway and it is therefore only the variable costs that are relevant for the decision.
The question doesn’t give any assumptions. It is a question of identifying which costs are variable and which costs are fixed and incurred regardless. This is made clear in the question but obviously could have been worded in any number of different ways.
Sir John, I have studied and would like to double confirm:
A) When we have Product A (one type of Product), and we would like to (outsource or in-house manufacture), this is how we calculate relevant cost
Outsourcing cost (Total cost of Purchasing/ also known as Variable cost of buying)
vs.
In-house Manufacturing cost (total variable cost and avoidable cost, for example, DM,DL, Variable MOH, Specific Fixed Cost, Incremental cost, avoidable cost).B) When we have two different products which are currently in-house manufacturing
Variable Cost, Incremental Cost, Avoidable cost (Minimum cost) of Product A
vs
Minimum Cost of Product BIn this case, unavoidable cost are not included in the relevant cost, as they are the same in both situation as both are still in house manufacturing
The lower cost will be viable for decision making
C) When we have one product which are in-house manufacturing with limiting factor (Machine Hour, Labour Hour, Materials), this is how we calculate relevant cost
Limiting Factor A (Machine Hour)
only the variable cost (DM, DL, Variable MOH)
vs
Limiting Factor B (Labor Hour)
only the variable cost (DM, DL, Variable MOH)in this case, the specific/ incremental fixed cost are not included, as they are the same in both situation
Relevant cost are difficult to understand, but it is easier if we understand the concept and the decision of the company. A confirmation from you would mean so much to me, appreciate Ask my tutor forum so much !
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