What is the incremental cost or benefit of buying the wheels as opposed to making them?
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.
- Sanders Toys is beginning to manufacture Bungey Wagons. The product will be sold to toy store chains for $12 each. Management allocates $120,000 of fixed manufacturing
overhead costs to Bungey Wagons. Themanufacturing cost for each wagon at the expected production of 10,000 wagons is as follows:
Direct material $ 13.00
Direct labor 4.00
Overhead ($1.20 fixed and $2.00 variable) 3.20
Total $20.20
The company has contacted a number of suppliers to determine whether it is better to buy or manufacture the wheels. The lowest quote for a set of 4 wheels needed for each wagon is $3.15. It is estimated that purchasing the wheels from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Sanders Toys’ manufacturing space is highly constrained. By purchasing the wheels, the company will not have to lease additional manufacturing space that currently cost $8,000 per year. What is the incremental cost or benefit of buying the wheels as opposed to making them?
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