Hattie Company has been purchasing 40,000 units of component, Part A25 for $38.40 per unit. Hattie is currently operating at 80% of capacity and no significant increase in production is anticipated shortly. The cost of manufacturing a unit of Part A25 is estimated as follows for 40,000 units: Direct materials $23.00 Direct labor 9.00 Variable factory overhead 2.24 Fixed factory overhead ($100,000 will be saved if purchased) 6.30 Total $40.54 a. Should Hattie Company buy part A25 externally or make them internally? Prepare differential analysis to support your decision.
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.
Hattie Company has been purchasing 40,000 units of component, Part A25 for $38.40 per unit.
Hattie is currently operating at 80% of capacity and no significant increase in production is
anticipated shortly. The cost of manufacturing a unit of Part A25 is estimated as follows for
40,000 units:
Direct materials $23.00
Direct labor 9.00
Variable factory
Fixed factory overhead ($100,000 will be saved if purchased) 6.30
Total $40.54
a. Should Hattie Company buy part A25 externally or make them internally? Prepare
differential analysis to support your decision.
b. If Hattie Company can rent the production facility to Petal Company for $150,000 when they
purchase part A25 externally, should Hattie Company buy part A25 externally or make them
internally? Prepare differential analysis to support your decision.
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