Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 437

decision-making process and together with relevant qualitative factors forms the information package

to be used by those within the entity. Relevant qualitative information may include risk-related factors

such as:

• an assessment of how existing customers will react to an entity selling one-off orders at a lower price


• the quality of service delivery by the outsourced provider


• the ability for the outsourced provider to deliver when required


• the financial stability of the outsourced provider.

When both the quantitative and qualitative analyses have been considered, an informed decision

can then be made to ensure the best outcome for the entity. In the next section we will further explore

these issues by looking at two operational decisions made by entities — outsourcing and special

orders.

10.9 Outsourcing decisions

LEARNING OBJECTIVE 10.9 Analyse an outsourcing decision.

An outsourcing decision (also called a make or buy decision when referring to a product) will

require an entity to choose whether to continue producing a product component or providing a

service in-house. Many entities today have chosen to outsource activities or to have a component

part manufactured by an external entity. For example, some universities outsource the teaching of

particular industry-based software to industry experts who have up-to-date practical experience in

using that software. Similarly, major car companies outsource the manufacture of many of their

vehicle component parts such as seat belts, windscreens and engines. Other services commonly out-

sourced by entities include building maintenance, office cleaning and security. When considering an

outsourcing decision, it is important to identify both avoidable costs (those that will no longer be

incurred if the decision is made to buy) and unavoidable costs (those that will still be incurred

under either option). Therefore, it is necessary to identify those costs that will change as a result of

a business decision. Costs that do not change are unavoidable and will be incurred regardless of the

decision taken.

Illustrative example 10.4 provides the financial input into the decision by a service entity of whether

it should outsource a business activity to an external provider.

ILLUSTRATIVE EXAMPLE 10.4

Outsourcing a business activity

Gee Vesty Accounting Services (Gee Vesty) is a suburban accounting business that provides services

to local entities. Its services include the maintenance of accounting records, the preparation of financial

statements and tax returns, and the provision of consulting services. Due to the increasing demand for

consulting services, Gee Vesty is considering concentrating more on this service area. In order to staff

the consulting activities, Gee Vesty is considering outsourcing the maintenance of clients’ accounting

records to a local bookkeeper. The following relevant information has been collected to assess this

proposal.

•   1600 billable hours per year are currently being charged to clients for bookkeeping services provided.

•   The charge-out rate is $200 per hour for Gee Vesty’s consulting services, and $50 per hour for its

bookkeeping services.

•   An external bookkeeper has quoted $2000 per week for 52 weeks.

•   An analysis of the overhead costs identified that $500 could be avoided each week if the bookkeeping

activity was outsourced.

The question could be asked as to why Gee Vesty is considering outsourcing the bookkeeping ser-

vice. Given the increasing demand for consulting services, Gee Vesty is faced with the issue of how best

to enable the capacity to provide these services. By outsourcing the bookkeeping activity, capacity