Replys
Bharat1122
PPT1.pptxRelevant Cost and Decentralization
Advantages of decentralization
There are many advantages of having a decentralized system like lower-level management becomes more responsible and gains expertise by solving day to day problems.
The higher-level management can focus on strategic plans and more important factors.
The operating environment gains much efficiency as the decision making table gets divided to further levels.
The response time in any case significantly gets reduced too.
Disadvantages of decentralization
The quality of lower level management decisions can hurt the organization overall at times
This situation occurs if the entire picture is not understood (Mbate, 2017).
The objectives of the management levels experience clashes in alignment from time to time.
This is impacting the overall operations of the organization.
Responsibility accounting centers
There are cost centers in which the managers work to bring the cost to the organization down.
This provides the best services to the customers.
The profit center management has full control over the cost and the returning revenues on the offerings.
The third is the investment center whose managers have all the control over cost, investment, and profit.
Operating assets
In the operating assets, all the cash allocated, tools, machineries, and equipment
Net value is used to calculate the operating costs averages.
It has certain limitations of depreciation costs always increasing and net book value decreasing.
Thus, always loss is shown by default.
Numeric example
Suppose if a company has two department manufacturing and selling department. During the year, the company has a stock of 1000 goods costing $ 100 each.
If a company gets an order for 2000 goods, then to fulfill such target the company needs to purchase and manufacture more 1000 units.
Thus in case of decentralization the sale manger will transfer such information to the manufacturing department.
Accordingly, the manufacturing department will direct the purchasing department about the materials needed to manufacture 1000 goods.
This distribution of job among the different department helps the organization to fulfill their target more effectively. In addition, it also helps the organization in performance evaluation of all individual departments.
Different costs and their benefit
There are many types of costs like avoidable costs
The alternatives can be weighed in to eliminate them.
These costs are relevant costs while those which are unavoidable
No alternative can fill in the gap are unavoidable ones and no decision can be further changed for them.
Isolating relevant costs
There is a need to isolate all the relevant costs
Firstly there is very little possibility that the information base is available for full income statement preparation in the organization for every identified alternative.
It is important to have relevant costs identified.
Secondly, the mixing of irrelevant costs and relevant costs is confusing and can cause errors and duplicates in the statement.
Cost analysis
There are many ways to do a cost analysis for the organization
Some of the standard headings are sales and fixed expenses that make up the majority of the statement (Chen & Koebel, 2017).
The fixed costs have many profiles like the salaries of the workforce, consumables, utilities, bills and insurances.
The result of this entire add up gives the net operating income for the company.
Make or buy decision
There are many aspects that revolve around a firm's decision to either manufacture a product or component in-house or buy it from other established vendors (Meng, Yao, Nie, & Zhao, 2018).
Future aspects, cost to cost analysis, expertise, and time frame to complete in-house manufacturing, development of the facility, and quality of the finished product comprises the main factors in the priority list.
Numeric example
A cycle manufacture company incurs a total cost of $420000 for Producing 10000 shifters.
Instead of manufacturing, if the company purchased the shifters from outside at a cost of $ 25 per shifter.
Then the total cost for company would be $ 250000. Hence comparing its cost required for manufacturing the shifter and the purchase price of the shifter for decision making as shown in the table
It is seen that instead of making, buying the shifter from the market would save $ 170000 cost of the company.
| Output (units) | 10000 | |
| Particulars | MAKE | BUY |
| Purchase Price | 25 | |
| Material Cost | 150000 | |
| Labor Cost | 90000 | |
| Variable Indirect Expenses | 80000 | |
| Relevant Fixed Overhead | 100000 | |
| Total Relevant Cost | 420000 | 250000 |
| Difference in Favor of Buying | 170000 |
References
Chen, X., & Koebel, B. M. (2017). Fixed cost, variable cost, markups and returns to scale. Annals of Economics and Statistics/Annales d'Économie et de Statistique, (127), 61-94.
Mbate, M. (2017). Decentralisation, Governance and Accountability: Theory and Evidence. Journal of African Democracy and Development, 1(2), 1-16.
Meng, X., Yao, Z., Nie, J., & Zhao, Y. (2018). Make or buy? It is the question: A study in the presence of carbon tax. International Journal of Production Economics, 195, 328-337.
