Page 284 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 13: Decision 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 profit
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.

13.4 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.

Example: If company X needs a machinery for a specific project and after that project
there is no use of the machinery then company can decide to hire the machinery for that project.

A company has its own trucks for transporting raw materials and finished products from one
place to another. It seeks to replace these trucks by keeping public carriers. In making this
decision, of course, the depreciation of the trucks is not to be considered but the management
should take into account the present expenditure on fuel, salary to drive and maintenance.

13.5 Shut Down or Continue

As discussed earlier, marginal costing technique helps in deciding the profitability of a product.
It provides the information in a manner that tells us how much each product contributes towards
fixed cost and profit; the product or department that gives least contribution should be discarded
except for a short period. If the management is to choose some product out of the given ones,
then the products giving the highest contribution should be chosen and those giving the least
should be discontinued.

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