440 Accounting: Business Reporting for Decision Making
(continued)Cost to outsource
Purchase price ($1.40 × 100 000 units)
Unavoidable fixed costs
Less: Lease income ($560 per week × 52 weeks)
Total costs to outsource
Additional costs to make$
$140 000
50 000
(29 120
160 880
9 120)The decision to outsource can be motivated by many factors such as the need to reduce costs, the
desire to free up capacity to pursue other ventures, or a decision to focus on core activities. Many entities
today outsource the routine aspects of their accounting needs, maintenance, payroll and recruitment. The
reality check ‘Outsourcing trend continues but with warnings’ provides two recent examples of likely
outsourcing decisions but also highlights the dangers.
REALITY CHECKOutsourcing trend continues but with warnings
Outsourcing (and offshoring) has become huge over the last 25 years and in many ways has trans-
formed the way organisational activity is conducted. While it may be pursued for a variety of reasons,
organisations are often seeking to reduce costs and focus their internal activities on what they believe
to be their value-adding activities. Two recent Australian examples relate to the likelihood of outsourcing
finance and accounting jobs at Virgin Australia and Fairfax Media. The combination of reasons includes
increased flexibility and cost-reduction objectives. While the risks associated with outsourcing these
types of support service tasks may be relatively low, this is not always the case.
For example, when Boeing outsourced a lot of the work on its 787 Dreamliner, they ran into all sorts of
problems such as parts not fitting together and contractors subcontracting some of the work to other com-
panies, the end result being that Boeing had to assume control of some of the previously contracted work.
Sources: ‘The trouble with outsourcing: outsourcing is sometimes more hassle than it is worth’ 2011, The Economist,
30 July, http://www.economist.com/node/21524822?zid=292&ah=165a5788fdb0726c01b1374d8e1ea285; King, A 2015,
‘Fairfax, Virgin look to outsource finance teams’, The Sydney Morning Herald, 28 April, http://www.smh.com.au/business/
accounting/fairfax-virgin-look-to-outsource-finance-teams-20150422-1mqhxz.html.10.10 Special order decisions
LEARNING OBJECTIVE 10.10 Analyse a special order decision.
A special order will require the entity to consider whether it would be willing to supply goods or ser-
vices at a reduced price or with special features, or a combination of both. As the label suggests, it is an
order which is different from an entity’s ‘normal’ customer orders. The answer as to whether the order
should be accepted will depend on many factors, including whether the entity has unused capacity or the
opportunity exists to have a long-term relationship with the customer. The time period for such decisions
is short term (i.e. during the current financial period), so existing fixed costs can be considered irrelevant
because any unused capacity will be within the relevant range. It is unlikely that the level of fixed-cost
expenditure will be altered in the short term. Therefore, only incremental fixed costs will be relevant for
such a decision.
In assessing a special order, it is important to identify the entity’s available capacity. Available
capacity (also referred to as idle capacity) indicates the amount of capacity an entity has available
to increase output. For example, a manufacturing entity that can produce a maximum of 100 000 units
(100 per cent capacity) might be producing only 90 000 units (90 per cent capacity). This indicates
that the entity has available capacity of 10 000 units (10 per cent). Any order up to 10 000 units can be
accepted without affecting current production or altering the existing level of fixed costs.