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Performance Management - Essay Example

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Performance Management

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 pi ...Show more

Summary

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. …
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