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Manufacturing is: The use of machines.MANUFACTURING According to Wikipedia. in which raw materials are transformed into finished goods on a large scale. It is is most commonly applied to industrial production. tools and labor to make things for use or sale. .

SUB CONTRACTING According to online business dictionary. or all. of the work that one has contracted to do. Subcontracting usually occurs where the contracted work (for example. sub contracting is: The delegation to a third party of some. the construction of a building) requires a variety of skills. .

. However. not in all cases could it be remunerative to subcontract out. Generally small scale units having the necessary facilities but with relatively low overheads can manufacture such items at lower costs and sell the same to larger units at a price also lower than the latter's manufacturing cost.THE DECISION Sometimes it is found that it is economical to subcontract out some parts of components rather than manufacturing the same in-house.

.WHEN TO SUB CONTRACT??? The most appropriate technique for taking a proper decision in this regard is Relevant Costing.

Only incremental and avoidable costs considered. Relevant costs are decision specific. or accept a special order. . make or buy an item. Examples of when management uses relevant costs can be seen when it is determining whether to sell or keep a business unit.RELEVANT COSTING Relevant Costing is a managerial accounting term that is used to describe costs that are specific to management's decisions.

could be made on the same machine in 2 hours for a marginal cost of Rs. 50 and a marginal cost of Rs. . A10. 'B' has a selling price of Rs. Should the company make or buy P . 12. Product 'B' takes 5 hours to produce on a machine no.50 per unit. 30 per unit. a component part.EXAMPLE PROBLEM FOR RELEVANT COSTING The ABC Ltd produces a variety of products each having a number of component parts.10. The supplier's price is Rs. Assume that machine hour is the limiting factor. 5 per unit. 1 working at full capacity.

20 ‡ Contribution per unit hour = Contribution per unit/Number of hours required = Rs.SOLUTION TO THE PROBLEM Contribution from product B: o Selling price per unit o Less: Marginal cost per unit o Contribution per unit Rs. 4 per hour .50 Rs.30 Rs.

e 2 * Rs.13 . 8 Rs. Opportunity cost of producing per unit of component P ² 10 is given by: Number of hours required for producing component P ² l0 * Contribution per hour from product B i. Per unit relevant cost of producing P . 4 = Rs. 5 Rs.10 Marginal cost y Opportunity cost y Total relevant cost y Rs..8.SOLUTION CONTD.

10 from outside. . it is advisable to buy component P .13.. 12. or in other words. subcontract its production. 0. Per unit cost of making component P²10 Rs.50 Excess of production cost over bought-out price : Rs.SOLUTION CONTD.50 The bought out price being lower as compared to the cost of production.00 Per unit bought out price of the component Rs.