Troy Instruments: Outsourcing Scientific Equipment

Questions and Answers

To provide benchmarks for performance evaluation (correct)

To establish communication channels

To reduce labor costs

To allocate resources efficiently

Full cost of producing the product

Fixed cost of production

Total variable cost (correct)

Business function cost of the product

All separable costs are incremental costs

Separable costs incurred before the split-off point are relevant

Joint costs incurred before the split-off point are irrelevant (correct)

The cost difference between selling and processing further is irrelevant (correct)

It partially recognizes the services provided among support departments Signup and view all the answers

To communicate objectives and coordinate actions Signup and view all the answers

Variable cost of production Signup and view all the answers

It ignores the joint costs incurred before the split-off point Signup and view all the answers

To make investment decisions Signup and view all the answers

To evaluate subsequent performance Signup and view all the answers

The cost difference between selling and processing further Signup and view all the answers

Study Notes

Troy Instruments uses 10 units of Part Number S1798 monthly, with a total manufacturing cost of $22,400
Direct materials cost: $4,000
Materials handling cost: $400 (10% of direct materials cost)
Direct manufacturing labor cost: $6,000
Indirect manufacturing cost: $12,000 (200% of direct labor cost)
If Troy purchases S1798 from Duncan Supply, the unit cost would decrease by $3,700

Decision models and performance evaluation models may differ due to:
- Different time frames
- Accounting systems enabling separate tracking of decisions
- Accrual accounting method incorporating irrelevant costs
- Top management's unawareness of desirable alternatives not chosen by subordinate managers

Relevant information for decision making excludes:
- Past costs (not relevant when making decisions)
- Significant past investment amounts (not relevant to decision making)
- Sunk costs (not recoverable and hence irrelevant)
Relevant information includes:
- Expected future revenues and total future costs
- Differences in expected future revenues and total future costs between alternatives
- Not all future revenues and expenses are relevant (only those affected by the decision)

Budgeting:
- Provides an opportunity to reevaluate existing activities and evaluate new ones
- Compels managers to think ahead and formalize planning responsibilities
- Aids in communicating objectives to units and coordinating actions across the organization
- Provides benchmarks to evaluate subsequent performance

If a company has excess capacity, the most it would pay for buying a product it currently produces (outsourcing) is the total variable cost of producing the product

In joint costing, joint costs incurred before the split-off point are not relevant in deciding whether to process the product further
Separable costs incurred before the split-off point are irrelevant in deciding whether to process the product further
The cost difference between alternatives of selling products or processing further is relevant
Joint costs and separable costs are not relevant in sell-or-process-further decisions