Accounting for Managers: Interpreting accounting information for decision-making

QUESTIONS 393

Cost to Cardinal to make each part:

Direct materials £4

Direct labour 16

Variable manufacturing overhead 8

Fixed manufacturing overhead 10

Total 38

The cost to buy the part from the Oriole Co. is £36. If Cardinal buys the part
from Oriole instead of making it, Cardinal would have no use for the spare
capacity. Additionally, 60% of the fixed manufacturing overheads would continue
regardless of what decision is made. Cardinal decides that direct labour is an
avoidable cost for the purposes of this decision.
Decide whether to make or buy the 20,000 parts, by comparing the relevant costs.

10.4 Cirrus Company has calculated that the cost to make a component is made
up of direct materials £120, direct labour £60, variable overhead £30 and fixed
overhead of £25. Another company has offered to make the component for £140.
If the company has spare capacity and wishes to retain its skilled labour force,
should it make or buy the component?

10.5 Bromide Partners provides three services: accounting, audit and tax. The
total business overheads of £650,000 have been divided into two cost pools. The
cost pools are:
Partners £200,000
Juniors £450,000

Partner hours are a measure of complexity and junior hours define the duration of
thework.Thehoursspentbyeachtypeofstaffare:

Accounting Audit Tax Total

Partner hours 150 250 400 800

Junior hours 1,200 2,800 1,000 5,000

Calculate the total activity-based cost of providing audit services.

10.6 Bendix Ltd is considering the alternatives of either purchasing component
VX-1 from an outside supplier or producing the component itself. Production costs
to Bendix are estimated at:

Direct labour £200

Direct materials 600

Variable overheads 100

Fixed overheads 300

Total £1,200