Page 246 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 12: Decisions Involving Alternative Choices

To find out the worth of the transactions, first the cost of manufacturing should be found out Notes

(`)
Material 7.00
Direct Labour 8.00
Other variable expenses 2.00
Total 17.00

The cost of manufacturing a component is ` 17.00. While calculating the cost of manufacturing a

component, the fixed expenses was not considered. The fixed expenses were not considered for
computation. Why?
The costs will be incurred irrespective of the production status of the firm; for which the expenses

should not be added.
If the company manufactures the product/component at ` 17 which will facilitate to book profi t
` 1 from the price of ` 18 which is available from the market.
The next stage is decision criteria.
Worth of Production: Cost of the production < Price of the product available in the market.
The firm is better advised to take the course of production rather than purchase of the product.

Worth of Purchase: Cost of the production > Price of the product available in the market
The product available in the market is dame cheaper than the manufacturing of a product. The

firm is better advised to buy the product rather than the manufacturing of a product. If the

product price comes down to the price of ` 16 facilitates the firm to save ` 1 from the cost of
manufacturing.

Task A refrigerator manufacturer purchases a certain component @ `50 per unit. If he
manufactures the same product he has to incur a fixed cost of `20,000 and variable cost

per unit of `40. When can the manufacturer make on his own or when he can buy from
outside?

Self Assessment

Fill in the blanks:

4. In the market, dealership is offered by the various companies to the individual intermediaries
in promoting the ……………… of products.

5. The firms, which are routinely in need of spares, accessories are bought from the outsiders
instead of any ………………, though the requirement is at regular intervals.
6. Under sales mix, the level has to be found out which is having lesser selling price, cost of
operations and greater profits known as ……………… of operations.

12.4 Own or Hire

Marginal costing helps in taking the decisions regarding the capital investment. Marginal costing
helps to take the decisions for owning the capital asset or hire the asset.

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