7-8 Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials $ 65.00 Direct labor 45.00 Overhead 126.50 Total $236.50 Overhead costs include variable material handling costs of $6.50, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 40% fixed costs.
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.
E7-8 Innova uses 1,000 units of the component IMC2 every month to manufacture one of
its products. The unit costs incurred to manufacture the component are as follows.
Direct materials $ 65.00
Direct labor 45.00
Total $236.50
Overhead costs include variable material handling costs of $6.50, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 40% fixed costs.
A vendor has offered to supply the IMC2 component at a price of $200 per unit.
Instructions
(a) Should Innova purchase the component from the outside vendor if Innova’s capacity
remains idle?
(b) Should Innova purchase the component from the outside vendor if it can use its facilities
to manufacture another product? What information will Innova need to make an
accurate decision? Show your calculations.
(c) What are the qualitative factors that Innova will have to consider when making this
decision?
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