Performance Management - Essay Example

? Performance Management Performance Management UGC Plc has decisions to make regarding the construction of the new system whether to carry the project in house or outsource the project to a subcontractor. The analysis and better decision making can be done by discussing the components of cost and their effects on the overall cost and final decision to be taken. All the costs that can affect the decision, rather all the relevant costs should be considered in this case. It is important to distinguish between relevant and irrelevant costs for the decision making purposes as it allows better decision making for cost reduction and cost maximization. Additionally overheads allocation should also be done on fairer and activity driven basis so that better decisions can be taken. (DRURY, C. 2008; HANSEN, MOWEN, & HANSEN.2006) The company shall lay150 meters of pipe each week in-house to utilize its labour and machine, however decision has to be taken for the remaining 750 meters for small pipe and 300 meters of large pipe to be laid in-house or subcontracted. Direct Material Cost: The company has an option to subcontract the project where the material cost will be borne by subcontractor, charged by UGC in the price quoted. On the other hand the company if undertakes the project in-house the direct material cost will be ?45/per meter on small pipe and ?55/meter on large pipe. Direct Labour Cost: Company can use in-house labour by shifting labour from other departments, there will be no opportunity cost involved as the company has substitute labour to be used in other department on the same rate. The crucial think here will be to decide if it is cost effective to use in-house labor if they are paid on overtime basis or would it be beneficial to subcontract. Also which of the pipes, small or large should be laid by the limited labour provided. (PROCTOR, R. 2009) Variable Overheads: With increasing automation the labour hours and costs have decreased and companies have lost the traditional measure of allocating overheads and therefore activity based costing, that is assigning costs to cost drivers are now used. If company decides to complete the project in-house it will incur variable overheads on per meter of pipe laid. Small pipe will incur ?5 while large pipe will incur ?10 on each meter of pipe laid. The variable overheads are allocated on the basis of meter, which is on the basis of activity rather than direct labour hours that is overheads are allocated on cost drivers basis. (KAPLAN & ANDERSON. 2007; HANSEN, MOWEN & GUAN, L. 2009) Fixed Overheads: Fixed overheads are irrelevant for decision making purposes and become unchanged regardless of the activity. In the scenario lease rentals are the fixed cost. These will be incurred by the company whatever decision might be taken and are irrelevant to the decision. If UGC subcontracts or undertakes the project in-house, in both the cases it has to pay the lease rentals for the machines. (WEYGANDT, KIESO & KIMME.2009; HANSEN, MOWEN, & HANSEN.2006) Detailed Analysis: UGC has decided to lay 150 meters of each type of pipe using the in-house facility. The remaining will be either subcontracted or will be done in-house depending on the cost and availability of labour. Direct labour is the limited resource in the project and company has to take its decision subject to availability. After laying 150 meters of each type of pipe which it plans to do, UGC will be left with 72.5 hours of direct labour on normal rate and 100 hours on overtime rate of Machine E and 30 hours on normal rate and 90 hours on overtime rate of Machine J. UGC now has to decide whether to lay small pipe or large pipe in this remaining capacity. For this it shall consider the cost it will incur to outsource the pipes and the cost of utilization of labour on normal and overtime rates. It will cost UGC ?56.83/meter of small pipe and ?89.16/ meter of large pipe using the normal labour. UGC has to incur ?60.83/meter to lay small pipe and ?104.16/meter on large pipe using the overtime labour rate. The analysis decides if normal labor is used company will save cost on both the pipes and has to decide which one to make. This decision will be taken on the highest benefit given by the choices or differential cost which is cost to make less the cost not to make. The small pipe if produced with normal labor will cost ?56.83 while if subcontracted it will cost ?65, hence it gives a benefit of ?8.17/meter. The large pipe if produced using normal labor will cost ?89.16 and if subcontracted will cost ?91; hence it will save ?1.84/meter. Therefore it is feasible and cost effective to produce small pipes using the normal labor. However for the overtime labour capacity small pipes in-house cost is less than the quoted price of subcontractor while the in-house cost for large pipes exceeds the price quoted. Therefore in overtime labour capacity too small pipes should be made. (HANSEN, MOWEN, & HANSEN.2006; PROCTOR, R. 2009; DRURY, C. 2008) Therefore company should make small pipes in the remaining capacity and subcontract the large pipes. In the remaining capacity of 72.5 hours of direct labour on normal rate and 100 hours on overtime rate of Machine E and 30 hours on normal rate and 90 hours on overtime rate of Machine J, UGC can make 150 meters of small pipe in the normal capacity and 450 meters in overtime capacity. Decision: UGC should lay 750 meters of small pipe in house and remaining 150 meters should be subcontracted, while for the large pipe 150 meters should be laid in-house and the rest 300 meters should be subcontracted. Based on this decision, the total cost of the project is as follows: TOTAL COST OF THE PROJECT Small Pipe (?) Large Pipe (?) Total (?) In-house production: Material 1,012,500 247,500 1,260,000 Labour Normal 90,000 112,500 202,500 Overtime 189,000 - 189,000 Variable Overheads 112,500 45,000 157,500 Subcontract cost: Total cost 292,500 819,000 1,111,500 Lease Rental Payments: Machine E 135,000 Machine J 99,000 TOTAL COST 3,154,500 Bibliography HANSEN, D. R., MOWEN, M. M., & HANSEN, D. R. (2006). Managerial accounting. Mason, OH, Thomson/South-Western. PROCTOR, R. (2009). Managerial accounting for business decisions. Harlow, England, Prentice Hall. DRURY, C. (2008). Management and cost accounting. London, South-Western. KAPLAN, R. S., & ANDERSON, S. R. (2007). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Boston, Harvard Business School Press. HANSEN, D. R., MOWEN, M. M., & GUAN, L. (2009). Cost management: accounting & control. Mason, OH, South-Western Cengage Learning. WEYGANDT, J. J., KIESO, D. E., & KIMMEL, P. D. (2009). Principles of financial accounting. Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso. Chapters 1-18. New York, Wiley. Read More