ng director of Antilles Refining, N.V., of Aruba. “At a price of $20 per drum, we would be paying $5.25 less than it costs us to manufacture the drums in our own plant. Because we use 95,000 drums a year, that equals an annual cost savings of $498,750.” Antilles Refining’s current cost to manufacture one drum is given below (based on 95,000 drums per year): Direct materials $ 10.60 Direct labor 6.50 Variable overhead
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.
We ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $20 per drum, we would be paying $5.25 less than it costs us to manufacture the drums in our own plant. Because we use 95,000 drums a year, that equals an annual cost savings of $498,750.” Antilles Refining’s current cost to manufacture one drum is given below (based on 95,000 drums per year):
| Direct materials | $ 10.60 |
|---|---|
| Direct labor | 6.50 |
| Variable overhead | 1.50 |
| Fixed overhead ($3.90 general company overhead, $1.55 depreciation, and $1.20 supervision) | 6.65 |
| Total cost per drum | $ 25.25 |
A decision about whether to make or buy the drums is especially important at this time because the equipment used to make the drums is completely worn out and must be replaced. The choices facing the company are:
Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $342,000 per year.
Alternative 2: Purchase the drums from an outside supplier at $20 per drum.
The new equipment is more efficient than the company’s wornout equipment and would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost ($114,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity is 150,000 drums per year.
The company’s total general company overhead would be unaffected by this decision.
Required:
- Assuming 95,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
- Assuming 120,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
- Assuming 150,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?
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