Cost Accounting

Coursework
Cost Accounting BU7403

By:
Bader Alameer 201501591
Sayed Hadi 201501011
Mustafa Ahmed 201400253
Nadeem Alqattan 201400483
Table of Contents
Question 1 ....................................................................................................................................... 3
Difference Between Process Costing and Job Costing .................................................................... 3
Example on Job Costing and Process Costing:............................................................................. 4
Job Costing:.............................................................................................................................. 4
Process Costing:....................................................................................................................... 5
How Process Costing Operates With Example of Other Industries and Meat Industry: ................. 5
Meaning of Actual Loss, Normal Loss and Abnormal Loss in a Meat Industry: .............................. 7
Process of losses: ......................................................................................................................... 7
- Actual loss:................................................................................................................................ 7
- Normal loss: .............................................................................................................................. 7
- Abnormal loss: .......................................................................................................................... 7
Two Approaches to Work in Progress: ............................................................................................ 8
1. FIFO Method ........................................................................................................................ 8
2. Average Cost Method .......................................................................................................... 8
Question 2 ....................................................................................................................................... 9
To: .................................................................................................................................................... 9
From: ............................................................................................................................................... 9
cc: .................................................................................................................................................... 9
Date: ................................................................................................................................................ 9
Re: .................................................................................................................................................... 9
Advantages and Disadvantages of Piece Rate Remuneration Systems: ......................................... 9
Advantages .................................................................................................................................. 9
Disadvantages.............................................................................................................................. 9
Applicability ............................................................................................................................... 10
example: .................................................................................................................................... 10
The Various Incentive Schemes ..................................................................................................... 10
High Day-Rate System ............................................................................................................... 10
Example ................................................................................................................................. 10
Advantages of High Day-Rate System ................................................................................... 11
Disadvantages of High Day-Rate System ............................................................................... 11
Individual Bonus Schemes ......................................................................................................... 11

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 Features That Differentiate This Bonus Scheme: .................................................................. 11
Possible Advantages to This Method: ................................................................................... 11
Possible Disadvantages of This Method: ............................................................................... 11
Example on Individual Bonus Scheme: .................................................................................. 12
Group Bonus Scheme ................................................................................................................ 12
Advantages of Group Bonus Scheme: ................................................................................... 12
Disadvantages of Group Bonus Scheme:............................................................................... 12
Example of Group Bonus Scheme: ........................................................................................ 13
Profit Sharing Schemes .............................................................................................................. 13
Advantages of Profit Sharing Schemes: ................................................................................. 13
Disadvantages of Profit Sharing Schemes ............................................................................. 13
Example on Profit Sharing Schemes: ..................................................................................... 13
Incentive Schemes Involving Shares.......................................................................................... 14
Advantages of Shares Incentive Schemes (Dormer, 2015): .................................................. 14
Disadvantages of Shares Incentives Scheme(nibusiness.info.co.uk, N.D.): .......................... 14
Value Added Incentive Schemes ............................................................................................... 14
Advantages of Value Added Incentive Schemes (Vskills.in, N.D.): ........................................ 14
Disadvantages of Value Added Incentive Schemes (Vskills.in, N.D.): ................................... 15
Incentive schemes can successfully work under the following conditions: .................................. 15
Question 3 ..................................................................................................................................... 15
Question 4 ..................................................................................................................................... 17
Factors Effecting the Decision: .................................................................................................. 17
A) Lead Time ...................................................................................................................... 17
B) Quality ........................................................................................................................... 17
C) Availability of Manpower, Machinery and Space .......................................................... 17
D) Quantity ......................................................................................................................... 17
References ..................................................................................................................................... 18

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Question 1

Difference Between Process Costing and Job Costing

Process costing is a method that allocates and collects the cost of manufacturing process to the
products. (Averkamp, n.d.). On the other hand, Job costing is a method that maintain the cost of
production job which means it has to gather information for each job and then every cost have
to be allocated to that job. Also, job costing has to include direct materials, direct labour, direct
expenses and production overheads. The overheads rate has to be taken either form the labour
hours or from activity based costing (Wilkinson, 2013).

The main different between job costing and process costing is that job costing is used when the
company operate on a special requirement from the customer. For example, “Diluigifood Co.” is
a meat production company where they operate as they take a special orders with specific
requirements from the customers so job costing method can be implemented in this case
(DiLuigi Foods, 2018). The process costing method would be suitable when the production
process are identical so Khaleej BSC is a great example for this method because the products
are homogenise with a slight difference that cannot be identified such as the tenderness of the
meat.

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Example on Job Costing and Process Costing:
A meat company had a factory working on a job and a single process the factory, the job started
last period was incomplete where they did not finish processing the meat, they incurred the
following costs to date:

Direct Material(Meat): 700 BHD

Direct Labour(240 hours): 480 BHD

Production Over Head: 300 BHD

During the current month the cost of Production to that job and the process within the factory
were as follows:

Direct Material issued to Job A were 500kgs worth 2330 BHD and the same amount is used for
the process, it is expected that the normal loss will be 5% of the meats during the single process
and the scrap value is 0.3BHD for each kg, Material transferred from other jobs to Job A worth
1000 BHD, materials returned to store from Job A were 580 BHD and the calculated actual loss
of the single process was 35 units worth 163 BHD. Direct labour hours worked were 300 hours
for each of the Job and the Process, the wages were 2BHD per hour and overhead was absorbed
at 1.5 BHD per direct labor hour same rates were applied to the Job as well as the Process. The
expected output of the Process is 475Kgs.

Job Costing:

BHD JOB A BHD

Balance b/f 1480 Materials returned
Direct Materials 2330 580
Materials transferred 1000 Cost of Sales
Direct Labour 600 3800
Overheads 450

4380

4380

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Process Costing:
Process Account

Units (kg) BHD Units BHD

Direct Material 500 2330
Output @7.1 465 3301.5
Conversion Costs Normal Loss @0.3 25 7.5
1050 Abnormal Loss @7.1 10 71
3380 3380

As seen in the example above there are differences in how to deal with process costing and job
costing and what sets of data are taking into the calculation process and how the outcome could
vary even though the same amount of materials, overheads and labour hours were used in the
job and process.

How Process Costing Operates With Example of Other Industries

and Meat Industry:

Process costing is a method used by cost accounting, to calculate and allocate costs of unit
produced by each process or stage in manufacturing (Averkamp, n.d.). Moreover, process
costing mainly used in companies that produce mass quantity of homogeneous products which
are difficult to trace directly to the product, also when the value of each unit output is low in
value (Wilkinson, 2013). In addition, process costing uses three different types depending on the
product which are weighted average costs, standard costs, and first-in first-out costing (FIFO)
(Bragg, 2017).

The method of calculating process costing consists of these steps according to Wikinson. At the
beginning the company analyzes the cost flow model to find inventory at the beginning of the
period, during the period and how much completed in the period. Then, record work in progress
at the end of the period, which is used in the work in progress number of equivalent unit
produced. In addition, the number of equivalent units produced is found by multiplying the
percentage of unit completed the work in progress. Next, calculate the direct and indirect costs
that are related to unit completed and the units still in progress, which includes the beginning
inventory and cost during the period. Afterwards, calculate the number of units completed and
equivalent units of output that are in the ending inventory. Finally, distribute relevant costs that
were completed and the units in work in progress.

Example of the steel industry process costing. First, the raw material of scrap will enter the
company. Afterward, the material will be transferred to work in progress which includes melting
the product. Next, the molds will be filled with the melted material from the ladle to form into a
billet. Then, billets will enter the reheat furnace which then the rolling mill will transfer them to

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the cooling bed. Finally, the finished goods will be steel bars and steel beam which is difficult to
trace to the raw material.

Figure 1 (Si, Thompson and Calder, 2011).

Example of process costing in the meat industry. First, the raw material will enter the company
which is caws. Afterward, the work in progress which starts with slaughtering caws as we are in
an Islamic country. Then, they would be moved to bleeding process after that the skin of the
caws will be removed. Next, the caws will be transferred to the cutting process were the head of
the caw will be removed, split them in half and cut them into small pieces. Finally, the finished
good will be skin, meat, bones, and fat which are costs that are difficult to trace to the raw
material.

Figure 2 (Britannica.com, N.D.).

Comparing the steel industry to the meat industry, both industries similar to the steps of
producing which are raw material, work in progress, and finished goods. Also, both industries

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use weighted average costs which is one of the methods used in progress costing, since the
change in product cost is so slight from period to period (Bragg, 2017). However, the only
difference is in work in progress as there will be different depending on the industry.

Meaning of Actual Loss, Normal Loss and Abnormal Loss in a Meat

Industry:

Process of losses:
Most of the processes that happens have some expected losses. In the meat industry they
would loss a specific percentage of the carcass while in the processing structure. These losses
that occurs are normal because of the production procedure would keep some loss is essential
to the production. So, the process of losses is distributed into three groups:

- Actual loss:
The actual loss is the current loss that happened in the processing of the production either it is
expected or unexpected to happen (Nelson, n.d.). For example, as in the meat industry the cow
dies before killing it and as the rules of the Sharia in the GCC, it is not allowed to sell or use this
cow, so they would lose it.

- Normal loss:
For the normal loss, it is the loss that happens due to the characteristic nature of the production
procedure under usual circumstance (ACCA, 2018). This loss is what the company anticipates, It
is not a given cost. This loss of cost is measured based on the previous experience of their
industry and normally it is measured by a percentage. For instance, for the meat industry; they
loss from the carcass weight of a cow approximately 30% to 35% (University of Tennessee
Institute of Agriculture, n.d.). These losses might be formed as normal scrap, usual wastage,
standard spoilage. It could happen any time of the production process (Sawant, 2012). To get
the cost of normal loss, it can be calculated by:

Number of units of normal loss = Input * expected percentage of normal loss

Consequently, the normal loss will be recorded in the Process Account by crediting it with 0
value if the materials lost cannot be sold or had no significant value, and it would be credited at
scrap value if it could be resold for a significant value.

- Abnormal loss:
Regarding the abnormal loss, it is the loss that happens suddenly under abnormal conditions
such as in the circumstances of the meat industry; the machine that holds the carcasses
breakdown or even as what mentioned previously that the cow dies before killing it or it could
be an accident of carelessness. These such losses would be pre-controlled normal losses, so they
are avoidable. Consequently, the abnormal losses arise when the actual loss is higher than the

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normal loss due to the reasons that are mentioned previously. However, if the actual loss was
less than what was anticipated (normal loss) it would be called an abnormal gain (Sunilkumar,
2014).

The abnormal loss is credited in the process account at Expected cost per unit which is
calculated as follows:

Expected Cost = {Direct Material Cost + Conversion Cost – (Normal loss units * Scrap value of
normal loss units)} / Expected output.

The abnormal loss should also be recorded in the Statement of Profit and Loss.

Two Approaches to Work in Progress:

1. FIFO Method:
Under the First In First Out(FIFO) method the costs are apportioned with the assumption that
unfinished units/materials already in the process are used and finished first, the main effect of
the FIFO method is that opening Work In Progress(WIP) costs are incurred at previous periods
price levels, therefore they are charged wholly to output. Therefore the closing WIP is valued at
the current costs (Aisha, N.D.).

2. Average Cost Method

Under this method, average unit cost is determined by taking the total value of both the
opening WIP in addition to costs incurred during the current accounting period, this methods
effect is that both the WIP and the completed unites are valued at average unit cost, this
method works with the assumption that opening WIP or unfinished goods are merged with the
units introduced during the process and can no longer be separately identified (Aisha, N.D.).

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Question 2

Meat Supplies Limited

Memorandum
To: Financial management

From: Consultancy

cc: CFO

Date: June 9, 2018

Re: Explain the advantages and disadvantages of piece rate remuneration

systems.

Advantages and Disadvantages of Piece Rate Remuneration

Systems:

Advantages:
The first advantage is employees will be more time efficient and more productive. for the
reason, employees are being paid based on unit produced, employees will work more efficiently
to maximize their output to increase their pay (LaMarco, 2018). Furthermore, employee’s will
not need a supervisor because they are being more efficient to gain greater wage (Reddy, 2018).
Which will result an increase in the output of meat in the factory and cut cost for supervisors.
second, the company will not be obligated to pay employees salary on idle time. Instead, they
will be required to pay the minimum wage (Lodha, 2015). Which will result employees being
careful using company machines and equipment’s to minimize the possibility of idle time. As a
result, equipment will need less repairing cost.

Disadvantages:
Disadvantages of using the piece rate system in the meat industry. First, as the meat industry
uses sharp equipment in cutting meat, as implementing piece rate system may cause injuries
(LaMarco, 2018). For the reason, employees are trying to maximize their output of meat to

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increase their wages. Second, using the piece rate system will increase the output of meat
produced by each employee but will reduce the quality. For the reason, employees are aiming to
produce more meat to increase their wages. Also, an increase in employee’s output may
increase the production cost due to more wastage of materials (Lodha, 2015).

Applicability:
Piece rate system can be applied in a meat company as the quantity of output each employee
can be measured, also for the reason the work of employees is repetitive as they do the same
activity (Lodha, 2015). Moreover, the formula is the total output times the wage rate per unit
which gives us the total wage of each employee.

Total Wages = Total Output × Wage Rate per Unit of Output

(link)

example:
if employees are being paid 0.2 BD for each Kg of meat they produce, and they have produced
560 kg of meat per week.

560× 0.2=112BD

The Various Incentive Schemes

An incentive scheme is an arrangement where a company gives extra payments to employees
rewarding their good performance (en.oxforddictionaries.com, N.D). bonus or incentive
schemes were introduced to compensate workers that work under any time-work system since
that system does not focus nor reward employees for working more efficiently (Paper F2
Management Accounting, 2017).

There are 6 Incentive schemes:

High Day-Rate System

A high day-rate system is when employees are compensated with higher hourly wages expecting
them to perform more efficiently (Paper F2 Management Accounting, 2017). It is calculated by
multiplying the Hours Worked by an employee into the Rate Per Hour.

Even though paying higher rates per hour might seem like increasing the costs, If the efficiency
of the employee was successfully increased the Cost per unit would decrease.

Example:

One employee responsible for loading meats into the trucks to supply the area is paid 5$ per
hour and would load 50 kilos of finished meat in 10 hours whereas a second employee being

10
paid 5.5$ per hour is motivated and loads 60 kilos of finished meat in 10 hours, the cost per
unite would be as follows.

Cost Per Unit Employee 1: (10 hours x 5$)/50 = 1$ per KG of meat loaded.

Cost Per Unit Employee 2: (10 x 5.5$)/60 = 0.92$ per KG of meat loaded.

Advantages of High Day-Rate System

a) A high day-rate system is easy to calculate and understandable.
b) The high day-rate system insures employees would consistently get a high wage.

Disadvantages of High Day-Rate System

a) Employees cannot possibly earn more than the fixed rate per hour for their extra
efforts.
b) It is not guaranteed that the high day-rate system would make employees produce
more efficiently.
c) Employees might prefer working to produce a normal rate of productivity even if it
means being paid less.

Individual Bonus Schemes

This method is a remuneration scheme where specific individuals are rewarded with a bonus in
addition to their basic wage, every individuals bonus is calculated separately (Paper F2
Management Accounting, 2017).

Features That Differentiate This Bonus Scheme:

a) It is unique to the individual.
b) The individual would get a higher bonus if they worked more efficiently.
c) Each individual should be rewarded for the work done specifically by him with no
assistance form other employees which means each employees output and time should
be measured separately (Paper F2 Management Accounting, 2017).

Possible Advantages to This Method:

A) Provides higher pay to higher-achieving employees and lower pay to lower-achieving
employees, therefore both motivate employees and cut costs on paying higher bonuses
to lower-achieving employees (Applegate, N.D.).
B) Avoids punishing hard working employees for the poor performance of the group
(Applegate, N.D.).

Possible Disadvantages of This Method:

A) Could be difficult and costly to supervise and measure each individuals performance
separately in the workplace to calculate the bonus.
B) Given the fact that the bonus is for and individuals specific work done with no
assistance, it could discourage team work and collaboration in a workplace which might
lead to inefficiency or lower productivity (Hamlin, n.d.).

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Example on Individual Bonus Scheme:
A meat cutter employee responsible for cutting and processing meats (indeed.com, N.D.), the
bonus is to be paid 50 cents per extra kilo of meat cut and processed, and the team of meat
cutters consists of 4 employees their basic pay requires them to produce a total of 240 kilos a
day. Today the team produced 260 kilos ( given the fact that Employee A individually produced
20 extra kilos) the pay would be as follows:

If the Individual Bonus Scheme was not applied here each team member would get:

0.5 x 20(extra kilos) = 10USD

10 x 4(number of employees in the team) = 40USD in total bonuses

Meaning Meat Supplies Limited would pay 40Dollars in bonuses even though one employee was
more productive.

Applying the Individual Bonus Scheme Meat Supplies Limited would save 30 Dollars by only
paying bonuses to the individual responsible for the extra production.

Group Bonus Scheme

This incentive plan relates to the performance of an entire team of workers, department or even
whole factory, It is used wherever an individual’s performance cannot be measured and when
teamwork is critical (Paper F2 Management Accounting, 2017).

Advantages of Group Bonus Scheme:

A) It are easier and cheaper to administer since the effort to monitor and measure every
individuals performance and outcome is not necessary (Paper F2 Management
Accounting, 2017).
B) It encourages collaboration and team work (Paper F2 Management Accounting, 2017).
C) It has been found that it is correlated to a workplace with lower accidents, spoilage,
waste and absenteeism. (Paper F2 Management Accounting, 2017)
D) This Scheme would get rid of selfishness in the workplace where employees will not aim
for personal gain over team gain since the whole group is rewarded together(Applegate,
N.D.).

Disadvantages of Group Bonus Scheme:

A) Employee groups might demand lower efficiency standards to accept the scheme (Paper
F2 Management Accounting, 2017).
B) Individual employees that do not work as hard as the rest of the team might be
intimidated by their follow team members for working slowly which causes a mental
distress within the workplace (Paper F2 Management Accounting, 2017).
C) Group Bonus Scheme might lead to individual employees carrying too much of the work
and others being rewarded for lower performances (Applegate, N.D.).

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Example of Group Bonus Scheme:
Part of the jobs in the Meat Supplies Limited is to store huge quantities of meat before shipping
them to the customers, meat is one of the most difficult edible products to store since it would
require a temperature of no more than 4°C (opentextbc.co, N.D.), therefore the technicians
team should insure no technical issues arise, in technical fields it is impossible to judge every
team member individually (Applegate, N.D.).

The Meat Supplies Limited could use the group bonus scheme with the tech staff maintaining
the temperature and environmental settings to store meat and they could be rewarded as a
team for quickly resolving any issues to maintain the safety of the meat stored, such as a 3%
bonus on the weekly wages for the team member if they managed to restore the temperature
before any of the meat is spoiled.

Profit Sharing Schemes

The profit sharing scheme is a system where a portion of the net profit generated by Meat
Supplies Limited is to be distributed to the employees based on the employees’ wages or years
of service, it could be in the form of cash, stocks or future credit such as after retirement (M.
HeathField, 2018), The company shares the profits only with the employees, the employees do
not take contribute to the losses (Sunitha, N.D.).

Advantages of Profit Sharing Schemes:

A) Motivates employees and give them a sense of belongingness to the company (Sunitha,
N.D.)
B) This method brings stability to the working place therefore the rate of labour turnover is
reduced since the employees are connected with the management (Sunitha, N.D.)
C) With this method employees acknowledge that they will receive rewards if the company
does well therefore they are more likely to want the company to succeed and invest
more effort and productivity in the work place (M. HeathField, 2018).

Disadvantages of Profit Sharing Schemes:

A) The Impact of the effort individuals invest in the company is not reflected and cannot be
seen in the company’s profitability, therefore even though employees would get their
profit shares, with time it will feel more of an entitlement rather than an incentive
factor (Heathfield, 2018).
B) Profits will be paid only when the companies efforts exceed a certain limit, meaning
there is no guarantee employees will be paid more for their hard work (Sunitha, N.D.).

Example on Profit Sharing Schemes:

An example could be if the Meat Supplies Limited reached to an agreement with their
employees that if the net income of the year was above a million US dollars they would share
that profit with their employees where some could get a 50% of their wages as a bonus in the
end of their period, this would motivate the employees of Meat Supplies Limited to work harder

13
and make the company generate profit, however the non-hard working employees would still
get a share of the profit.

Incentive Schemes Involving Shares

This incentive plan can be implemented by rewarding the employees with stocks or shares of
the Meat Supplies Limited (Investinganswers.com, N.D.).

Advantages of Shares Incentive Schemes (Dormer, 2015):

A) Rewarding employees with shares of the Meat Supplies Limited instead of actual money
would save tax costs on both the employee and the Meat Supplies Limited where the
tax on shares are either tax free or with a percentage of up to 10% whereas the income
tax applied on other incentive paid in cash could reach up to 47%.
B) When employees hold shares of the company they would work more efficiently to see
the Meat Supplies Limited grow and increase in value so their shares would be worth
more.

Disadvantages of Shares Incentives Scheme(nibusiness.info.co.uk, N.D.):

A) If the share prices drop it would have a devastating impact on the morals in the work
place reducing the productivity.
B) The more Meat Supplies Limited issue or give shares to the employees the lower
percentage owned of shares becomes to the owners.

Value Added Incentive Schemes

The idea behind this incentive scheme is to reward employees only when the wealth of the
shareholders is increased (vskils.in, N.D.), which is the financial goal of Meats Supplies Limited
and any other company (Financialmanagementinfo, 2010). However, since the Meats Supplies is
a limited liability company they cannot issue shares meaning there are no shareholders
(Investopedia, N.D.), but the Value Added can apply to the partners/owners wealth instead.

To calculate a proper bonus using this scheme first the company should calculate the Economic
Value Added (EVA) in the Meats Supply Limited which is a measurement of the company’s
financial performance based on how much wealth did investors/owners in this case gain
(Investopedia, N.D.), to calculate EVA= Net Profit of Meats Supply Limited – (Debt + Equity’s
Book Value) (Berber, Pasula and Radosevic, 2012).

Using the formula Meats Supply Limited will know if the wealth of the owners was increased
and by how much and based on that decide on the reward of the employees.

Advantages of Value Added Incentive Schemes (Vskills.in, N.D.):

A) It encourages the management to consider their assets as well as expenses and debts in
in the process of deciding on bonuses.

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Disadvantages of Value Added Incentive Schemes (Vskills.in, N.D.):
A) The cash adjustments associated with the calculation process for EVA could be time
consuming.
B) Applicable for the period the EVA has been measured in, for every bonus new
calculations should be made.
C) Explains two different approaches that may be used where a company has
opening work in progress as part of its inventory.

Incentive schemes can successfully work under the following

conditions:

 Meat supply limited have to be clearly mentioning the goals of the scheme and it should
be achievable by the workers.
 The schemes conditions must be easy to understand so the workers do not confuse and
work based on the rules.
 The incentive scheme has to be fair and it has to satisfy the employer and the
employees.
 The incentive must be paid as soon as the employees made the extra effort.
 The employees who did not make that extra effort should not be rewarded.
 Meat supply limited have to use the right way of communication to deliver the scheme
and its purpose.
 The incentive scheme must be accepted by everyone related to it.
 Payment should be prepared for any external factors that will pause the work such as
materials shortage or machine breakage for example if there was a shortage of meat or
the meat were disposed if its inedible due to it not meeting the health requirement.

Question 3

The contribution margin in accounting is calculated as the total sales minus the cost of sales. To
add up, the contribution margin discloses on the amount of a company’s sales that is
contributed to the profit after covering the costs or expenses of the product or service to get the
net income (Averkamp, n.d.).

When negative contribution occurs, it means that the cost of sale or the expenses of the
product are higher than the selling price which is opposite to the normal or positive
contribution. In order to keep the contribution positive, the selling price should be higher. But
sometimes if the product or service had high price then the demand will be low or there might
be no demand on the product which will lead to a loss meaning it is not possible to increase the
selling price. Thus, the production should be discontinued (Averkamp, n.d.).

15
Moreover, in some cases, the negative contribution of a specific product or service would
benefit the company because of the low price of the product might keep the company widely-
known and attract customers to the company increasing the sales of other products. Therefore,
the company can cover the losses from these products or services that have negative
contributions therefore the product should be continued. however, the negative contribution of
a product should have a time-limit and then discontinued because it could be too costly for the
company. If the company does not generate money from the product that had a negative
contribution, then they should discontinue on producing it. Also, when the contribution is
negative the loss will not just occur from the selling price and cost of sales; the fixed cost will be
added on the contribution that happens normally in any product (Averkamp, n.d.).

If the product or service was recently launched, then the contribution might be negative due to
the Product Life Cycle as seen below.

The reason contribution is negative for newly launched is that the product is that the product
could be in the Introduction Stage, this stage is the most expensive for a company since there
would be various costs incurred and absorbed into the product, such as marketing costs,
research and development costs, or even because the product or service is not yet recognized or
accepted by the public. If the costs absorbed into the product are high it would cause a low or
likely a negative contribution (Product Life Cycle Stages, 2018), therefore the product or service
should be continued for a while since it is expected that it would enter the growth and maturity
stages which would result into to a positive contribution.

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Question 4
Make or Buy decisions is when the company has to decide whether to internally produce a
certain good or purchase it from an external source or supplier (Kashyap, N.D.).

Factors Effecting the Decision:

A) Lead Time
Lead time is the delay or time between ordering and receiving the goods (Vermorel, 2014).

What should be considered about lead time s that if the required goods have a maximum lead
time that surpasses the time by which the company needs the required goods to be available
and the company could produce those goods within the time frame needed then this should
influence the company into producing the required goods themselves.

B) Quality
The company should consider the quality of the required goods that they produce and the ones
they could purchase from external suppliers since the quality of those good would affect the
quality of the final goods, if the company can produce the required goods with a better quality
then they should produce it, however if the supplier offers the same required goods with better
quality then this should influence the company to purchase the good (Gartenstein, N.D.).

C) Availability of Manpower, Machinery and Space

The company should take into consideration whether they have enough employees within the
organization and if they can afford to move them from their current jobs and responsibilities to
work on the production of the goods, and if not they should consider if the availability of
external workforce and if they are qualified and poses the needed skills and expertise. Likewise
with the machinery, if the required machines to produce the goods are available and the
company can afford to stop using them in their current production lines and use them into
producing the required goods or if the machines are available to be bought or rented from
external sources.

In addition to that space should be considered, if the company has enough available space to
create a new work place and suitable work environment for the employees to work in and to
store the machines that will be used for the production of the required goods.

D) Quantity
The quantity of the required product is a factor in the make or buy decision since if the company
requires only one batch of the goods on a yearly basis or only one batch as a one time thing for
a unique or specific job then it would not be efficient to invest time and effort into making a
production plan or to move employees and machines from their current production lines or
tasks and responsibilities to facilitate the production of this required good instead of focusing on
their tasks (Gartenstein, N.D.).

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References
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