CAR ACCESSORIES COSTING

Car Accessories Costing and Financial Plan



Car Accessories Costing and Financial Plan

Introduction

An organization has to determine as to whether making and selling the products is a better option or purchasing ready-products to sell is more cost-friendly (Kotler & Armstrong, 2004). In order to do so, detailed “Make or Buy” decision-making costing techniques are required, which elaborate all the aspects of costing and present a clear picture of the feasible option. Both the scenarios are presented below:

Making the Product

Certain things are to be assumed, which are listed below:

The Selling Price is to be set at £18 per unit.

The organization has machinery that can produce 200 units in a month.

In order to reach the quantities above 600 units of production, a new machine has to be installed, which would result in the increase of factory overheads.

The “Indirect Labour Cost” was charged at were charged at £ 1000 per month till 600 unit production level and £1500 after 600 production level.

The “Indirect Labour Cost” is adjusted in the 800 units and 1000 units production column as the production would take place in 2 and 3 months respectively (2 machines are working so 800 units produced in 2 months not 4)

“Factory Overheads” were charged at £1000 per month till 600 unit production level and £1500 after 600 production level.

The calculations are presented in the Table 1 on the next page.

TABLE 1

200 Units

400 Units

600 Units

800 Units

1000 Units

Direct Materials @ £ 1.00

200

400

600

800

1000

Other Direct Costs @ £ 0.25

£ 50

£ 100

£ 150

£ 200

£ 250

Direct Labour @ £ 2.50

£ 500

£ 1,000

£ 1,500

£ 2,000

£ 2,500

Total Direct costs

£ 750

£ 1,500

£ 2,250

£ 3,000

£ 3,750

Indirect Materials

£ 50

£ 65

£ 78

£ 90

£ 100

Indirect Labour

£ 1,000

£ 2,000

£ 3,000

£ 6,000

£ 7,500

Advertising

£ 50

£ 150

£ 250

£ 350

£ 500

Factory Overhead

£ 1,000

£ 2,000

£ 3,000

£ 6,000

£ 7,500

Total of Indirect costs

£ 2,100

£ 4,215

£ 6,328

£ 12,440

£ 15,600

Total of Direct + Indirect Costs

£ 2,850

£ 5,715

£ 8,578

£ 15,440

£ 19,350

Buying the Product

Certain things are to be assumed, which are listed below:

The Selling Price will remain £18 per unit.

The organization will be purchasing the readymade products at £12 per product.

Other adjustment costs include the cost of branding and packaging.

The “Direct Labour Cost” is the labour cost of packaging.

Advertising cost remains the same.

“Factory Overheads” reduce as expenses like major heating lighting, depreciation and other expenses are not to be incurred any more.

The calculations are presented in the Table 2 on the next page.

TABLE 2

200 Units

400 Units

600 Units

800 Units

1000 Units

Purchasing Readymade Product @ £ 9

2400

4800

7200

9600

12000

Other Product Adjustment Costs @ £ 0.5

£ 100

£ 200

£ 300

£ 400

£ 500

Direct Labour @ £ 0.75

£ 150

£ 300

£ 450

£ 600

£ 750

Advertising

£ 50

£ 150

£ 250

£ 350

£ 500

Factory Overhead

£ 250

£ 500

£ 750

£ 1,000

£ 1,250

Total Costs

£ 2,950

£ 5,950

£ 8,950

£ 11,950

£ 15,000

Costing Technique

The costing technique used is Marginal Costing. This is because the marginal costing provides a good picture for comparison of two or more aspects of calculating costs (Hisrich & Peters, 2001, p. 87-90). Marginal Costing also enables the decision makers to calculate the breakeven point easily as it provides fixed costs and variable costs separately. The technique is presented in Table 1 by splitting the costs ...