BSB6403 -Cost Accounting
Group Assessment
Tutor name: Hammad Mohiy ud Din
Class number: 01
Due date: 24th December, 2014
Name
Ali Yusuf
Fatema Mohammed
Sara Busaqroo
Zainab Al Mansouri
ID Number
201201237
201101214
201100257
201101069
Table of Contents
Question Number 1: Cost accountant as a professional toolkit. .................................................................. 3
Question Number 2: Cost minimizers and revenue maximizers. ................................................................. 5
Question Number 3: service and knowledge based economy. .................................................................... 8
Question Number 4: Factors that affect the discontinue of product or service. ....................................... 10
Question Number 5: Make or buy decision. ............................................................................................... 10
References .................................................................................................................................................. 13
Appendix ..................................................................................................................................................... 19
Question Number 1: Do cost accountant uses a professional toolkit?
Every professional at a job uses a number of tools in order to perform his duties as well, for a cost
accountant, a unique toolkit is required.
Firstly,-cost accountants-are-also-called-managerial-accountants, -industrial-accountants,-and private-or
corporate-accountants,-where-they-all-perform-the same-functions-of-preparing-data-for-use-withinan-organization;-accordingly,-their-features are-distinguished-from-other-types-of-accounting-jobs,
such-as-public-accounting.
As-the-duty-of-a-cost-accountant-is-to-determine-the-cost-of-a-certain-product, -service, -process-orproject-of-a-company-he-needs-to:
1. Acquire-a-set-of-skills and techniques-in-order-to-perform-his-duty-efficiently. -These-skillsinclude;
 Allocating-manufacturing-overheads-cost-to-products
 Analyzing-cost-behaviors
 Preparing-cost-reports-and-costing-audits
2. a cost-accountant-should-be-familiar-with-a-number-of accounting and costing concepts such
as:
 Standard-costing
 Operational-and-capital-budgeting
 ABC-costing-method
 Transfer pricing
 Cost volume profit relationships and other concepts(Averkamp, H.,2014)
For-instance, some-of-those formulas would-include, Breakeven-Formula, Target-Net-Income,
Contribution-Margin, and-Price-and-Efficiency-Variances.(Boyd, K.,n.d)
Since the process of costing can be approached in many ways, different costing techniques have been
developed throughout the time that each concentrates on certain factors. These techniques are known
as uniform-costing, marginal-costing, standard-costing, historical costing and absorption costing.(Dr.
Periasamy, P.,2010) -As-a-cost-accountant, these-techniques-should-be-well-mastered-since-they-are
main-elements-in-a-cost-accountants-toolkit.
For example, Gulf-Hotels-Group-B.S.C. which-is-specialized-in-hospitality-and-leisure services in-Bahrain
has a specific department which is Cost Controller within their financial department; that-consist of a
number of professional cost accountants which have their own sophisticated costing-systems and
techniques of calculating and allocating their costs. For-instance, -they-add-the-costs-of their raw
material-of-food-and-beverage-to-the-administrative-costs, and-add-the percentage of the profit in
order to price their costs.(The Gulf Hotel Bahrain,2014)
On the other hand, there are other business perspectives where they believe that good public
accountants or financial accountants are also able to do much more than just recording numbers or
producing financial reports; they can:
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
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
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Provide guidance and advice
Convert financial data into business information that can be acted upon
Help-in-choosing-the most-appropriate-business-structure
Determine-the-working-capital-needs-by-setting-up-an-overall-accounting system
Prepare tax returns and give constant advice on peak tax efficiency
Assist with; budgeting, cash flow management, internal controls, lease-or-buy decisions,
inventory strategies, pricing, and other consulting to help the business grow.(CostHelper,Inc,
n.d)
For-instance, Bahrain-Tourism-Company-BSC- (BTC) does not have a particular department of cost
accountants’ professionals(Bahrain-Tourism-Company,2012), as they-are-a-The-Travel-Company-BTC
uses a three-step model to calculate-the-final-sales-price-which-their-accountants-can-carry-outwithout-the-need-for-experts. The-model-consists-of-calculating:
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

Direct land costs; e.g. hotel costs, meals, tour-director, tour-bus-and-entrance-fees
Direct flight costs; e.g. flight tickets prices
A margin based on the direct land costs; by using a specific optimized Margin Formulas and
calculating the Margin for Customized Tours.(DataGroup Stiftung,n.d)
In appendix 1, it shows the Difference between Financial Accountants and Cost Accountants’ duties and
responsibilities:(Bragg, S,2013)
From our point of view, it is quite fair to describe a cost accountant as a professional with a toolkit, a
toolkit that includes all the above-mentioned skills, techniques, knowledge and competencies and even
more. And this toolkit is what differentiates a cost accountant from a public accountant; although they
might share some of the tools, such as the knowledge of the general accounting principles and the
numerical skills, a cost accountant outstands with various tools of his own that are related to
determining the cost of a product-or-service-accurately,-controlling-it, and preparing-appropriate
recommendations-for-the-managers-to-enable-them-make-the-right-decisions-regarding the
manufacturing-and-sales-of-the-products. Hence,-to-make-the-most-efficient-use-of-the-resources-and
reach-the-maximized-profit-for-the-company.
Consequently, we conclude that despite the vital importance of having a professional cost accountant in
the company, it might not be necessary for all the companies to have one, as it depends on the
business’s operations, their methods of calculating their costs, the accounting software systems they
use and their production and service targets. Especially, the small and medium organizations might see
that cost accountants will-increase-their-labor-expenses-compared-to-the-revenue-they-make-with
their-good-public accountants, thus, they-tend to run their businesses without professional cost
accountants and yet make profit and succeed in their field.
Question Number 2: Cost minimizers and revenue maximizers.
Cost Minimizing
Cost minimization is defined as the ability of making the correct decision about choosing a combination
of inputs in order to minimize the total cost of producing a given quantity of output of a firm(Besanko,
D,2004). Therefore, cost accountants who aims at making the firms’ owners as wealthy as possible, try
to choose from all the combination of inputs, the one that will minimizes the firm’s costs of production.
Cost accountants take into consideration the Explicit Costs; which are direct monetary outlay costs such
as, wages, rent and material, and the Implicit Costs; which do not include outlays of cash, they are
opportunity costs that the firm should give up in order to use other alternatives for purchases or
hires.(Besanko,D.,2004). For-instance, the-Gulf-Air-airline’s-expenditures-of-fuel, flight-crew-salaries,
maintenance(explicit-costs), and the cost of flying the-plane will make them sacrifice the income of
leasing their jets to other airline(implicit-cost).(Gulf-Air,2013) Thus, cost accountants can determine
what-the airline sacrifices by calculating the sum of explicit and implicit costs, when it makes the
decision-of-flying-one-of-its-planes-on-a-particular-route.
From a consumer’s point-of-view, accusation has been built based on the outside fact that they seefrom the companies’ processes that the cost accountants look at the costs and eliminate some. For
instance, ENOC-is planning to convert some of its petrol stations-in the UAE into self service petrol
stations as a cost minimization procedure after company cost accountants said that it has high
costs(Hanif,N.,2013).
From-a-business-point-of-view,
-cost-accountants-are-accused-of-cost-minimization-due-to-themtrying-to-continuously-reduce-the-costs-in-order-to-increase-profits. -This-is-mainly-done-by-choosingthe-method-of-costing-and-the-costing-system-which-will-be-discussed-below. -The-techniques-usedby-cost-accountants-in-dividing-costs, -defining-different-cost-methods-&-creating-analysis-all-leads-toreaching-to-accurate-costs-but-sometimes-these-accurate-costs-are-not-the-lowest-which-leads-tochoosing-the-lowest-cost-which-might-be-inaccurate. -Therefore, -inaccurately-estimating-costs-mightlead-to-lower-profits-and-this-is-the-main-reasons-why-businesses-accuse-cost-accountants-with-justaiming-to-reduce-costs. -On-the-other-hand, -this-business-accusation-might-not-be-valid-due-to-thedemand-of-profitable-goods-by-business-management-and-therefore-to-solve-this-issue-themanagement-should-ask-cost-accountants-to-concentrate-on-accuracy-and-nothing-else. -This-leads-toan-important-point-which-is-the-need-to-reduce-the-deficiencies-created-by-some-product-lines-oractivities-in-production-and-not-the-costs.
http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Costing-Methods-Manufacturing.html
Revenue Maximizing
While other cost accountants analyze the factors to increase revenue depending on a certain amount of
input at a fixed cost.(Drexel-University,n.d) This can be done mainly by finding ways to use all the
resources in order to increase production and at the same time work on ways to increase sales.
Mainly,
-in-application-of-revenue-maximization,
-selling-price-may-be-reduced-as-the-aim-is-toincrease-sales-no-matter-what-in-order-to-enter-the-market,
-gain-customers-and-throw-outrivals(Cromwell, J.,n.d.).For-instance, -the-concept-involves-selling-until-marginal-revenue-becomeszero-where-profit-is-not-the-aim. -Whereas, -in-profit-maximization, -they-produce-until-marginal-costand, -marginal-revenue-are-equal. -For-example, -Samsung-implements-revenue-maximization-whereit-sets-a-lower-selling-price-and-tries-to-sell-as-much-as-they-can-than-Apple.
-Whereas,
-Appleimplement-profit-maximization-by-setting-higher-price-which-provides-them-with-higher-profit-margin.
Thus, Apple-makes-more-profits than Samsung where Samsung takes up more market
share.(Kumar,A.,2012) Another-way-is-for production-to-be-maximized is by enhancing the production
process in order to increase-production-quantity, -while -sales-can-be-maximized-by-implementingmarketing-concepts.
This process has a limitation which is the amount of resources available and the production capacity of
the company. As well as, that in the long run it is more suitable to apply profit maximization because
there is a point where the company would need some returns.(Tutors2u,n.d.)
Added to these points cost accountants use their "professional toolkit" mentioned in previous report
parts to analyze the best ways to increase revenue and decrease costs. An important point is also
elaborated under the costing decision which is the investing of extra resources -created by the accurate
resource allocation- in new products or more products in order to increase revenue.
Profit Maximizing
It-is-a-process-that-verifies-the-best-output-and-price-level-to-maximize-its-return. -The-company
adjusts-the-important-factors-like-sales-process, cost-and-output-levels-to-reach-its-profit-goal. There
are-two-profit-maximization-methods-which-are-Marginal-Cost-Marginal-Revenue-Method-and-Total
Cost-Total Revenue-Method.(Investorwords,n.d) Where-marginal-revenue-should-be-higher-than
marginal-cost-and-total-revenue-should-exceed-the-total-cost; in-order-to-gain-profit.
Barclays Bank implemented back in 1967, an ATM machine.(Robat,C.,2006) Nowadays, almost all banks
provide ATMs with wide variety of-services including cash withdrawal, balance checking and even
cheque processing and bills payment. This procedure cannot be seen as a direct cost minimization
because they are costly; however, they are more efficient and quick. The job of cost accountants here
will be to analyze costs of each job in order to see if it is better to be served through ATMs or through
bankers and therefore reducing costs and maximizing the profits.
From our point of view, both revenue and profit maximization have their benefits where at certain
stages, the-company-needs-to implement revenue maximizing in the short to medium run to gain the
market but for the long run they should aim at profit maximization as they need returns for the work
they put in. In addition, the-efficient-way-for-being-a-profit-maximize-is-understanding-how to
maximize revenue and minimize costs in an appropriate way such as studying all the available
alternatives of input and resources and their costs and use them in the most efficient way to produce
the maximum amount of output; the decision that leads to the highest profit for the company.
Costing decisions
The-duty-of-Cost-accountants-in-a-firm-is-to-collect-and-analyze-the-different-factors-of-the-firmsinput-and-production-processes-in-order-to-prepare-recommendations-for-the-managers-regardingthe-cost-of-each-factor-and-how-to-control-it.
-In-order-to-achieve-this,
-they-need-to-choosebetween-implementing-the-Traditional-Costing-and-the-Activity-Based-Costing-system-depending-onthe-type-of-the-activity-of-the-company.
-The-traditional-costing-method-assigns-the-total-cost-ofmanufacturing-the-product-including-overhead-costs-to-one-cost-driver-which-decreases-or-increasesthe-realistic-figures-of-some-overheads-and-costs.(Johnson,R.,n.d)
While-the-ABC-method-allocatesthe-costs of the activities-preformed-to the cost driver of that specific activity.(Heisinger, K.,& Hoyle,
J.,n.d) Moreover, the decision of choosing between the costing methods will help in decreasing the
costs.This is clear in some businesses where they use both costing methods for different products
produced by the business and the choice made is up to method generating lowest cost. Nevertheless,
the greater the accuracy of costs is the more accurate profit margin can be applied which leads to profit
maximization. (Malmi,1997)(Kucera,2007)
An example, -is-the-one-shown-in Cliff-notes website-mentioned in previous parts of the report. Here
ABC method is more accurate than traditional method yet the second will be chosen for a Hollow C.B.
which might lead to losses because costs were under-estimated. (Cliff-notes,2007)
ABC-system-also-clearly-and-accurately-divides-resources-on-activities-and-therefore-eachproduct/activity-will-have-the-exact-resources-needed-to-perform-or-produce-it. -This-helps-inaccurately-measuring-the-cost-and-gives-the-best-solution-for-answering-the-accusations-stated-to
cost-accountants. -Moreover, -this-helps-in-measuring-the-extra-resources-or-unused-resources-in-the
business-which-then-can-be-spread-on-the-production-of-more-goods-depending-on-the-amount-ofresources-left-and-the-product-needs. -Thus, -more-products-can-be-produced-and-more-revenuefrom-these-products-can-be-generated-which-is-a-very-efficient-way-used-by-cost-accountants-tomaximize-revenue-and-profits-overall.
Profit Maximization using the
Marginal approach
Profit Maximization using the totals
approach
Question Number 3: service and knowledge based economy.
When addressing this question the traditional product costing will be examined first in the service based
economy and then in the knowledge based economy.
Introduction on both economies
Firstly, the service based economy; this economy is based on services industries. Labours are found in
this economy and the value adding is common creating more overheads. The use of technology in the
service economy has decreased the number of employees in the service industries. (Ventura-Dias, 2011)
Secondly, the knowledge based economy, which is an economy that has products and services involved
in it but depends on the knowledge, research, technology and innovation in production. Therefore,
highly skilled labors; like experts, consultants etc. are found in this economy. Even in the production
industries in this economy, computerized production plays a huge role. (OECD, n.d)
Determining overhead recovery rate
An overhead recovery rate is a rate that helps allocating the overheads/indirect costs to the particular
product or job, in order to get the total cost. Allocation happens according to the most overheads'
representative & relative cost driver in the product production process. Therefore, if a product line uses
mainly labor mostly in production then it is most efficient to use direct labor hours as the cost driver.
(Basu, n.d) ("What is overhead rate?")
Note: Appendix 2 could be referred for summarized points regarding the analysis of traditional system.
Usage of direct machine hours
In-the-service-based-economy, -no-production-of-goods-is-taking-place-which-leads-to-no-machinesused-for-direct-production. -Therefore, -it-is-not-found-here-in-the-service-economy-by-the-exactmeaning-of-"direct-machine-hours"-as-used-in-manufacturing-industries-in-the-manufacturing-basedeconomies-especially-that-services-are-intangible-goods. -Even-though, -sometimes-when-machinesare-used-in-some-industries-they-are-not-the-final-service-provider-nor-they-might-be-used-for-thewhole-time-of-the-service-for instance, -more-than-one-machine-used-. Adding-to-that, -the-machinesmight-not-be-the-ones-giving-the-value-or-service-but-the-value-added-to-this-service. -An-examplecould-be-the-hotel-service-in-which-a-lot-of-machines-are-used--like-elevators, -laundry-equipmentand-others--and-are-only-treated-as-value-added-services-and-not-the-main-one. -Therefore, -it-isinefficient-to-use-machine-hours-as-the-cost-driver-for-all-overheads. -Yet, -there-are-machines-usedfor-completing-the-services-and-which-can-be-used-in-certain-circumstances-as-a-machine-directlyrelated-to-the-final-outputted-service. -For-instance, -the-usage-of-Automated-teller-machines- (ATMs)
-as-a-customer-server, -therefore-here-direct-machine-hours-can-be-used-to-divide-rest-of-theoverheads-related-to-bank-transactions-because-most-of-the-transactions-might-take-place-using-it.
In the knowledge based economy, the service industries in it are not much different from the service
based economy and the same points apply. Added to them, is the consideration of the high technology
machines, which might make it more applicable to choose the hours of the skilled labours who operate
these machines rather than the machine hours because they are the main producer of product. On the
other hand, the machines here might make a better cost allocator due to the possibility of there being
machine produced final products in some industries. Moreover, the use of high level technology makes a
chance for computers aided manufacturing and advanced machines to take the human labour place in
production and therefore they will be the main cost driver.
Usage of direct labour hours
In-the-service-based-economy,-the-introduction-of-high-leveled-technology,-innovation-and-creativityin-service-providing, -advanced-machines-and-computerization-is-controlling-more-than-labours-insome-industries. -Accordingly, -less-number-of-labours-might-be-needed-in-those-services, -whichmakes-the-use-of-direct-labor-hours-inefficient-for-them. -An-example, -is-the-foodservice-industrywhere-the-usage-of-technology-and-machines- (like,-using-applications-to-order-food, -food-vendorsetc.) -is-reducing-labour-needs-in-that-industry. (Pullen 2012) -More-about, -there-is-a-chance-that-theskilled-labours-&-experts-are-treated-as-consultants-and-therefore-they-are-just-a-value-added-to-theservice-and-not-treated-as-direct-labour. -This-will-lead-to-a-time-&-cost-issue-of-categorizing-labourswhich-might-be-inefficient. -On-the-other-side, -labours-are-an-important-cost-driver-in-the-serviceeconomy-as-they-can-be-measured-in-most-industries-easily-and-it-can-be-an-efficient-way-to-allocatecosts-especially-when-labours-are-directly-involved-in-providing-the-service.-For-example, -intelecommunications-industry, -labors’-hours-used-in-serving-the-customers-in-the-customer-servicecall-centers-are-the-ones-used-as-cost-drivers-because-the-labors-are-the-main-service-provider.
In-the-knowledge-based-economy, -some-points-agree-with-the-service-economy, -for-instance-theincrease-in-computerization-which-will-lead-to-less-labours-and-this-is-not-only-in-the-service-industrybut-also-in-the-manufacturing -industry-as-now-computer-aided-manufacturing- (CAM) -isimplemented-in-many-industries.("Techopedia")An-example-is-CAMs-software-and-programs-used-bySiemens-Company-for-aiding-the-manufacturing-process. - ("CAM", 2014)But-at-the-same-time, -thesecomputers-or-machines-will-need-experts-to-operate-them, -therefore-creating-direct-labor-hours. But-choosing-the-machine-or-labour-will-depend-on-the-exact-operation-and-industry, -for-instancesome-advanced-machines-will-need-less-labours-to-operate-them-and-the-need-is-not-all-along-theproduction-time. -Nevertheless, -the-increase-of-skilled-labours-will-help-in-opportunities-for-moreprofessional-services-being-made. -These-services-will-probably-have-the-skilled-labors-hours-as-themain-cost-driver-due-to-them-being-the-main-cost-and-service-provider. -An-example-of-theseservices-is-the-Auditing-service-which-can-be-a-professional-service-which-involves-auditors--beingdirectly-involved-in-producing-the-final-service.
Solution/Recommendations
According to the above analysis of traditional costing and appendix 2 the solutions given are:
Firstly, there are many cost drivers which can be used in a service and knowledge based economy that
will help the costing procedure and overheads allocation to be more efficient. Some examples are:
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Time estimates: This is an estimate for the time spent on an activity, for instance estimate of
time spent by employees to do a particular service.
Complexity: The level of complexity can also be a cost driver, for example a scale could be used
by a service industry on which the level of complexity for each service is defined. Then this
particular level defined for the particular service can be used as a cost driver.
Volume: The number of services provided is a cost driver. For example, a customer service
industry, the number of customer served is the main cost driver.
(Stranahan & MacArthur,1998)(Cardinaels & Labro,2013)
Moreover, -other-costing-methods-are-there-like-target-costing-and-Activity-Based-Costing(ABC) which-is-commonly-used-in-the-service-&-knowledge-based-economies. -Concentrating-on-ABCmethod, -it-helps-to-allocate-each-overhead-to-the-right-product-or-job-by-dividing-each-overhead-onits-suitable-cost-driver-and-this-will-help-in-more-efficient-cost-and-overhead-allocation. -This-willhelp-in-identifying-the-resources-needed-for-each-product-and-thus-making-it-easier-to-allocate-costsof-the-resources-to-the-product. -The-usage-of-ABC-is-more-accurate-especially-in-service-economieswhere-labours-and-machines-are-not-the-only-factor-driving-costs. -An-example-from-Cliff-noteswebsite-is-referred-to-in-previous-parts, -this-example-shows-how-the-measurements-of-ABC-is-moreaccurate-than-traditional-costing; -yet-it-also-gives-some-signs-that-the-traditional-costing-is-a-validmethod-which-should-be-used-in-some-cases-depending-on-the-nature-of-product-and-industry.(Cliffnotes,2007) (Johnson,n.d)(Chea,2011)
Question Number 4: Factors that affect discontinue of product or service.
The decision of discontinuation of a product is not limited to it having a negative contribution.
Differential cost analysis:
It shows the different costs involved in various options and their affect.
1. Fixed cost:
The-product-with-the-negative-contribution-generates-revenue-but-it-is-not-sufficient-enough-to-fullycover-its-variable-and-fixed-cost. -This-fixed-cost-will-remain-whether-or-not-the-company-continuesor-discontinues-the-product-which-will-cause-the-profit-it-be-even-lower- (appendix-1). -This-may-
have-a-pervasive-or-not-a-pervasive-effect-on-the-profit-of-the-other-products-and-the-overallprofit(Principles-of-Accounting,n.d.).
In-addition, -if-the-fixed-cost-allocated-to-the-product-is-high-and-will-significantly-affect-profits-thenit-is-better-to-continue-with-the-product, -if-the-fixed-cost-is-minimal-with-no-substantial-effect-onprofit, it may be-acceptable-to-discontinue.
Moreover, -these-allocated-unavoidable-costs-should-be-analyzed- (Heisinger, -K., -& Hoyle, J.,n.d.).Itmay-be-allocated-on-inaccurate-basis, -where-using-ABC-might-provide-a-more-precise-figure. -Thismay-lead-to-allocating-lower-fixed-cost-which-may-make-the-contribution-positive-or-if-the-fixed-costis-higher- the contribution-will-have-a-bigger-negative-figure-which-is-not-in-support-of-continuation.
2. Closing down costs:
Another cost that should be-taken-into-consideration-is-the-cost of closing down the department of theconcerned product(Principles of Accounting, n.d.). By closing the department, it may reduce thenumber-of-customers-in the-stores that may eventually reduce the sales of other products. In addition, costs-of-inventory write off and other incremental costs-that may be involved in the-closing down. This
may be higher to bear than a negative contribution.
3. Opportunity costs:
The opportunity cost of-continuation- or-discontinuation-should be analyzed as well. By discontinuation
of product, its-area and-equipment may-be sold or out up for rent which may generate some revenue. If
the decision-is-to-continue-the product, then the opportunity cost is the revenue generated from the
rental or sale. In order to analyze the opportunity cost, rental or sale revenue should be offset with the
loss of discontinuing a product (Heisinger, K., & Hoyle, J., n.d.). In appendix 2, it shows the effect of
opportunity cost on the decision.
Selling price and variable cost:
Another factor to be-considered-before-discontinuation is where or not the selling price can be
increased or the variable cost could be decreased (Principles of Accounting, n.d.). If the company is ableto-increase-its-selling price where it won't affect the demand, then the contribution will-increase-whichmay-become-positive. Also, if variable cost could be decreased either such as substituting raw material
with cheaper one but with similar quality or by better allocation of-labor-and-machine-hours. If neither
the selling price nor the variable costs-could be changed then it may be better to discontinue but with
consideration of the other factors.
Market:
The-future- and potential-of-the product in-the-market-is-should-be-known. To elaborate, the product
might-be-at-its introduction-stage where-it might-not-generate positive contribution but after-this
phase, it-might-create-positive-contribution. Thus, the forecasted pattern of the product should be
taken into consideration as well.
Geographical location:
A product-should-be-introduced in the appropriate regions where it is demanded (Mind tools, n.d.). A
product with negative-contribution-might-not necessarily mean that it is unprofitable in other branches.
Thus, if the product can be transferred to the relevant branch or outlet or region, it might not necessary
to stop its production.
Social factors:
In addition, failing-at-selling a-product with a profit might be considered as weakness by the consumers
and the rivals-might-make-use-of-this commercially. Thus, this will affect the company's reputation.
However, if a company-demonstrates that it-cares about the society and creating job opportunities,
then it may help their reputation (Warren C., Reeve J., Duchac J., 2011). For instance, part-of-Toshiba'smarketing and reputation depends on social contributions such as-protection-of the natural
environment (Toshiba, 2012).
These are factors that may occur with a cost or negative impact exceeding the effect of negative
contribution of the-concerned product. Thus, it is-the-analysis-of the various factors and their effect
which are involved in discontinuation of the considered product and the effect of losing the-revenuethat it-generates should-be-analyzed to-reach an appropriate decision-on-whether to-continue ordiscontinue a product with negative contribution.
Other factors:
Some other factors could affect this decision like the production for competition. For instance, some
companies produce some goods only for the sake of winning the competitors and overcoming them in
the market. A good example is restaurants which provide some extra dishes just to bring in more
customers even if these dishes were unprofitable. Moreover, factors like government grants and
subsidizing of some products could be a reason for making some products in order to get the grants;
even though the production process generates losses.
Question Number 5: Make or buy decision.
The make-or-buy decision is process of taking a strategic choice between purchasing an item from a
supplier and making it internally. (Investopedia, n.d.)
The followings are the-factors that need to be taken in concern for the decision.
Quality
When-the company-is able-to make-the item-in better-quality-than-purchasing it from the supplier,
then the company should create that product internally. As the company uses-its own materials and
labors therefore the company can charge high prices. But if the company-have lack of knowledge in
producing this product type, then choosing a specialist supplier is better to make the product better. For
example, Apple and Dell companies supply some of product to improve their technology components
and to have better quality of product. (Sinha, 2013)
The company that-produces an-items that-needs a special-design-with-unique-manufacturing-skills, and
there is a limited-number of capable and reliable supplier, then it is better-to produce it. For-example:
Mercedes cars is unique and need a-specialist to produce it, therefore the manufacture uses their own
worker in order to produce it differently from other as well as to keep their own design of
manufacturing secretly. (Nmims-optumiz, 2011)
Quantity
The product-number that the company need will affect the decision of making it or purchasing it. If the
company needs one or two units, then it does not make sense to open up the whole production process
for this amount. If there is high-demand on an item, it can be an appropriate cause in not making a
product internally. For example, if the company uses thousands of boxes to wrap up products, then it is
regularly cost-effective to agree with supplier that could create them to a custom size. (Gartenstein,
n.d.)
Convenience
If the company is-working in high-mechanism of reaching a continuing demand, it could be more
convenient to create the product than-purchasing. If the suppliers that produce the goods that the
company need is in another country-and cannot deliver the required-product on short notice, then-it is
more-convenient to make that product. The convenience of making or purchasing products might
change in relation to the size of business you are presently transacting, and the-space size-and surplus
labor that the company have. (Gartenstein, n.d.) . For-example, el waleh abaya shop provides-their own
unique designs of abayas and they cannot supply the product from another country as it will take long
time in delivering it. Therefore they make their own to attract the customers.
Marketing
One-of the marketing-strategies is producing the product internally. Company that produces and sells its
own line of product could present more customers’ value and a strong brand. For-example, a café that
makes its own dressings could give a unique flavor which increases the customer-value toward it.
Confident and discriminating customers regularly pay close-attention on either the company sells
product that is made or purchased. By producing your own inventory, it could assist in building loyalty
and educating clientele. (Gartenstein, n.d.)
Availability of-production capacity
Sometimes, -it-is-just-the-lack-of-enough-production-capacity-that-set-off-a-buy-or-make-decisionprocess-into-act. -According-to-the-fact, -non-availability-of-capacity-frequently-acts-as-an-incentivefor-the-venture-to-visit- (or-re-visit) -the-buy-or-make-decision. -This-provides-them-the-opportunityto-evaluate-technological-and-strategic-factors, -and-re-align-their-basis-strategies-with-the-entirebusiness-strategy.(Nmims-optumiz,2011)
Checking-out-every-production-order-operation-whether-there-is-a-sufficient-capacity-if-there-is-anenough-capacity-then-the-company-will-choose-to-make-their-own-product-and-if-the-company-is-notcapable, -then-the-company-will-purchase-it-from-the-supplier.(Investopedia n.d.)Two-main-exampleshere-are:


Availability of Labour: Many companies decide whether to produce or not depending on the
labours availability in the market which is one of the main factors of
production.(Riley,2012)(Agricultures network,n.d.) For example, China had a great revolution in
production of goods due to high availability of cheap labour but now these cheap labours are
decreasing which gives chance for other economies to produce.(Wadhwa ,2012) Therefore,
industries producing in China will know have a decision to take whether to continue producing
in these hard circumstances of low labour or buy from other economies.
Availability of Material: Again raw materials used are an important thing for production and
some areas lack sufficient materials to produce, thus this will determine whether they should
import materials and produce or choose to just buy goods. An example is the lack of materials
that Dominica's Bello Factory had in 2011 which kept the business in the decision making area of
import and produce or just buy.(Dominica,2011)
Core-competency:
Something-that-extremely-regularly-comes-to-a-decision-the-non-strategic-and-strategic-of-acomponents-nature-prepared-by-a-manufacturer-is-the-core-competence-that-the-business-succeedsand-desires-to-preserve. -In-situation-where-the-manufacturer-keeps-an-activity-to-be-a-different-corecompetency-in-contrast-to-its-direct-competitors, -the-business-would-extremely-probable-to-keep-onwith-the-in-house-making. -For-instance, -over-the-years, -Honda-continued-with-its-power-train-
design, -engine-and-manufacturing-because-they-are-appeared-as-part-of-its-core-competence. -Ifthese-activities-are-being-outsourced, -then-Honda-will-become-a-strategically-at-risk. - However, some-components-that-go-in-to-the-product-could-be-considered-as-stand-items-not-a-corecompetence-such-as-head-light-and-batteries. -Those-components-could-be-bought. -Therefore-Hondaand-its-supplier-mostly-focus-on-their-core-competencies, -in-the-anticipation-of-a-win-win condition. Usually, -the-majority-of-the-business-outsource-their-logistical-and-IT support-to expert-servicecorporation.(Nmims-optumiz,2011)
Based-on-additional-analysis, -appendix-3-shows-different-factors-are-taking-in-account-in-decidingwhether-to-make-or-outsource.(Nmims-optumiz,2011)
Other factors:
Some-other-factors-can-also-affect-this-decision, -like-the-government-influence. -For-example, -theSanctions-forced-by-UN-on-Iran-had-decreased-the-ability-of-Iran's-economy-to-import-goods, therefore-Iran-have-to-produce-most-of-the-goods-themselves. -This-leaded-to-decisions-ofsubsidizing-&-agreements-formed-which-in-a-way-forced-some-business-to-produce, -thus-this-playsas-a-factor-that-leads-to-the-decision-of-production.(Nikou,2014) -Nevertheless, -factors-like-businessstart-up-can-play-a-role-in-affecting-production-decisions-because-some-business-will-start-with-asmall-capital-making-it-hard-to-produce-therefore-they-will-have-to-buy-to-survive-the-start-upproblems.
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Appendix
Appendix 1:
Appendix 2:
Cost driver used
Direct Machine
Hours
Economy
Service based
Advantages
 Sometimes machines
are the ones who
produce the final
Disadvantages
 No production,
therefore no
production machines.
service.




Knowledge based


Direct Labor Hours
Service based

Can be used
especially for goods
production taking
place in the economy.
A lot of high
technology machines
are used in
production, therefore
easier to use machine
hours.
Labors are directly
involved in making
and providing the
service.




Knowledge based


Labors are highly
used in production of
goods.
With the increase in
skilled labors more
professional services
might be needed in
which direct labor
hour can be the main
cost driver.


More than one
machine used
Machines are usually
not the direct
producer of the final
outputted service.
Services are intangible
goods, which makes
machine production
less applicable.
Machines might only
be the value added to
the service not the
producer of the
service.
Skilled labors
operating the
machines are there
which might be a
better cost driver.
The issues of service
industries using direct
machine hour’s
repeats here.
Many services are now
a day computerized
and therefore less
labor is needed.
Many skilled labors
and experts are
treated as consultants
and as a value added
to the service and not
direct labor. Therefore,
an issue of separating
labor.
Less labour is used in
providing services
because high
technology decreases
usage of labor.
Even in manufacturing
computers play an
important role leading
to automated
production which

Computers &
machines used for
production are
operated by labor
which creates direct
labor hour.

decreases usage of
labor in this economy.
Even if labors are
needed they will not
be needed to operate
the machines all of the
production time.
Appendix 3:
Product X (BD)
Product Y (BD)
Continue Y (BD)
180
Discontinue Y (BD)
100
Difference (BD)
80
Variable costs
(70)
(20)
50
Fixed costs
(50)
40+10 = (50)
-
60
30
30
Sales
Contribution
Sales
100
80
Variable costs
(20)
(50)
Fixed costs
(10)
(40)
70
(10)
Contribution
Appendix 4:
Continue Y (BD)
Discontinue Y (BD)
Sales
180
100
Discontinue & sell
Product X (BD)
100
Variable costs
(70)
(20)
(20)
Fixed costs
(50)
40+10 = (50)
(50)
Selling (opportunity cost)
-
-
70
Profit
60
30
100
Appendix 5:
Making a part in-house
Outsourcing
Cost deliberation – less amount of cost to make the
Wish to hub on core competency and subcontract
item
the rest activities
Aspiration to continue the core competency in-
investigate and specialized of Suppliers’
house
lack of production materials or insufficient
Enhanced control of transportation, lead time and
capacity
warehousing costs
wish to decrease the capital expenditures
Wish to incorporate plant operations
limited expertise
Creative use of surplus plant capacity to assist
absorb fixed overhead (using existing idle capacity)
Cost considerations (less amount of cost to buy
the item.)
Require to use direct control over quality or and
production
To make better quality control
Design confidentiality necessary to protect unique
technology
Small-volume necessities
Wish to sustain a multiple-source procedure
improved inventory control by seller
product not necessary to the company strategy
undependable suppliers & useless suppliers
right of entry to wider pool of talent, particularly
in engineering and science
the quantity to produce
better assurance of repeated supply
social, environmental and Political
reasons (union pressure)
Appendix 6: