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    Activity Resource Usage

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    Eg Cachapero

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    =e resource Usage tivity : Activity d Tactical Decig, Model an | Making After studying this chapter, you. should be able to: BE Describe the tactical decision-making model. EB peti the concept ot fl Bb spin now te activity rerource usage models Bib onthe atc meking conceptsn a variety us opsective [ib Deserbe the tactical decilor-making moc chapter 3. Activity Resource Usage Model and Tactical Decision Making considerable excess capacity or airlines? Interestingly, this crisis led passenger cao ee ere specia-ordr offers to instead transport cargo, including delivering seetes and workers in the grocery and medical fields to areas In need Of asstang Fonther complicating matters in order to enable social distancing on its flights aa the pandemic, Delta enacted sel-imposed capacty constraints, such a capo the anit in est Cass and 60 percent In Main Cab, as wells Blocking ¢ aa eerie seats unless acjacent to members of he same party These ca sartdy actions force aiines to be even more careful in making effective specat are because far fewer regular-prced tickets exist to cover othersigniicant cg evens the scope ofthe specal-order scenario. Therefore, the next me you ae pore enough to enjoy an empty adjacent Seat, consider the specia-order, that might have led to your good fortune. int “This chapter focuses on one of the mose widely applicable copies in cost management decision making, For example, companies use a tactical decision-making proces lke th, ‘Ceamine here to analyze a wide range of important decisions, including which cistngsmae Slave (or new ones eo open), which eurrent products or services co drop (or new one to sPeich special offers from other companies ro accept of rejett. Such tactical decison, large or small in scale and often are observable in ‘everyday life. a “Roarand Ray Magliozs (also known as Click and Clack, the Tappet Brothen) weekly radio show advising interested callers on chit atomosive problems Fre ha wed Rey use tactial decision making to suggest possibilces. For example, one caller ate aaa bout his wifes 13-year-old Ford Escort. The cat needed its ar filter replaced 0 oe dee to oll buildup inthe box that holds the files. No mechanic had been able osc Jrablem. Tom and Ray 200med in the answer. The problem was due ro “blowby’— di reer caears when combustion gases lak from inside the cylinders into the erankcas. Soo th and presure overwhelm eheerankeae vention sytem and all gts blown back in ae eicet housing, cs ruining the ar filter. What to do? Tom and Ray suggest ewo Fine replace the engine. This option will solve che underlying problem, buts wilox $500. Second, just kep replacing the air ler every so weeks. They figured chat aS inka the caller could do that every sx weeks forthe next 17 years. The point of couse almost surely a waste of money—the rst oft placing new engine in an older car was Prpuld wear out long before the new engine Wore OM: I wejoe role ofthe cost management information system i supplying os and eens shar ee alfa in tctel decision making, Ths chapter feases onthe ute of cost and even cna ae decision making, To make sound decisions, he user of che cos information mi ieee whac information isclevant, 3s wells what information i irrelevant coche desea TACTICAL DECISION MAKING ists of choosing among alrernatives with an immediateerl eon the aifline industry, 2cceptingaspel idle capacity and increase this yea’ pro ae objective is to use idle productive ap “Tactical decision making consi end in view. As illustrated in che opening featu forless chan the normal selling price to use i example of tactical decision making, The immedi a Low Fre Evie FE Dep HSHingrtein and Boomer, "Soutwe Anes CEO Pris Fo erm (ay 32080) ep rune com/202070/30/oubwe ant GS Ler demandcoronaia,acened Agu 3.2020 E daeees Bima ite tedl an axon, "Cornnde: Aine Bre fr Sve Tele ace Coty Metin ao (Apel 20), eps Iarerckinseycom inden seed Aap arcornavira-aidines brace forseverewrblene infaurocrre/ourisi i Block Midle-See Selection Cp fore Space svough Summer: Dl chapter 3 Activity i \ctivity Resource: y "e Usage Model and Tactical Decision Making increase short-run profits. Thus, sits sade — tac decisions end vo be shor rn in acres however, ed example. Suppose char 4 em decbonsofen ar lngrn onequences Consider bine om wpe. The imine oe sien prod. componens nae of mvc. Ye shistactiea decision maybea:mall arto uhe rel spagyoferaing seat see aac nen in lin wage img Func immediate objecti a es should support this overall objective, ae Beh etter oka h ee or eee company. As demonstrated throughout the hag risely afer ucilizing an effective tactical oeuriaee ea ee. ae The Tactical Decision-Making Process general cactcal decision-making model is outlined in the six-step process listed below. Recognize and define the problem. [dency alternatives as possible solutions to the problem, and elimin: alternatives dencify che costs and benefits associated with each feasible alternative. Eliminate the costs and benefies that are not relevant co the decision. ‘Compare the relevant costs and benefits foreach alternative, Assess qualicative factors. Select che alternative with the greatest overall net benefit. ate any unfeasible step 1: Define the Problem To illustrate the steps of she proses consider an apple step aa ach year 25 percent ofthe apples harvested are small nd odd-shaped Thess apples Pe dn che normal disibution channels and have simply been dumped n he ‘orchards anew eowner snot satisfied with his approach nd wants ro detexmine she Bes 39 o handle these apples sep 2: Identify Feasible Alternatives: Several areratives a= being considered: Sell the apples to pig farmers. ) and sell cher to local supermarkees as seconds, Rane local eanning facility and convert the applet ro applesauce Fane alocal eanning failicyand converse apples ro Pie filling. Consinge with che eurent dumping practice alternative 1 was climinats Bag the apples (five-pound bags ed because there were not enough local pig Sie 5, che status quo, was eliminared at the requsst i rave the local canning facility did noc have che “he local canning Facility’ equipment could posible Finally. since local sepermaskess ng could be done ac the warehouses deemed feasible. Of these alternatives, ced in the apples: alterna ative 4 was eliminates pie filing. However, making alternative lar apples and bagat sand 3 were of the owner. Altern: equipment needed to produce be used to produce applesauce, greed to buy five-pound bass ‘of regu: rive 2 was also a possibilty Alremative ict Costs and Be predicts that nate Irrelevant Costs Suppose and ties) forthe bagging oPtoR 1d be sold for $1.30 per bag co sund for facility renal abor, five, 16-ounce cans of nefits and Elimi Tabor and materials (bags «pound bags of aples cul ‘cost $0.40 per Po «ds of apples v0 produce step 3: Predi thae the apple producer sr jd cose 80.05 per pound: The fv =e ode supermarkets. Making applesauce Yo pple, cans, and oxber material IE cakes six poun 119 a Usage Model and Tactical Decision Making Ghapter 3 Activity Resource can will se_ll for $0.78. The cost of growing and harvestin ach 16-040 Bthe pplesaue. Each own gtbenncen the bagging akernative and the applesauce alernaivg Pt step 4: Compare Relevant Costs and Benefits Thebaggingalemativeconsy35 | se i chee pound bag ($0.05 X 5 pounds), and the evenue is $1.30 per bag, or $0, Poe Povpencits $02 per pound (80.26 ~ $003) For he applesauce alters, PSE Seas ruse Ss Sanson aRqUAGus, Ta VENUE Ra $5.50 (6% $0.78), which converts to $0.65 per pound ($3.90/6). Thus, per pound ($0.65 ~ $0.40). Of the two alternative, che applesauce option offers $0, ve Foand dan the begging option. po $025 04 mae Step 5: Assess the Qualitative Factors Qualitative factors are those items that very difficule so translate into dollars, For the apple example, the producer currenly i gat involved in producing ny apple consumer products ands reluctant co move nto apples production He has no experience in this pa of the industrial value chain and knows lige about the channels of distribution for applesauce. An outside expert would need to be hi ‘Additionally, she rental opportunity i year-to-year issue. In che long term, 4 major cap commirment might be needed. Bagging the small apples, on the other hand, isa produat differentiation strategy that allows the producer to operate within familiar tersitory. | Step 6: Select the Best Alternative While the applesuce option sabe more lucayg the qualitative factors argue against it. Therefor, the bagging alternative should be choyeg__ This alternative maintains the current position in the industrial value chain and strengeheny the producers competitive position by followinga differentiation strategy for the small od. shaped apples. j Summary of Decision-Making Process ‘The six steps define simple decision ‘A decision model isa set of procedures that, if followed, wll lead toa decision. Exhibit 3 summarizes and illustrates the steps for the decision model for the apple producer. Steps 3and4__ define acrcal cost analysis. Tactical cost analysis is the use of relevane cost and revenue dita, identify the alternative that provides the greatest nec benef to the organization. Ths, ect analysis includes predicting, identifying, and comparing relevant costs and revenues, As we have sen, however, tactical cost and revenue analysis is only part of the overall decision proces, ‘Qualitative factors deserve more discussion. Qualitative Factors ; Step $ ofthe decision-making model s critically important, While cost and revenue information is important, other information, often qualitative in nature, is needed to make an informed decision. For example, the relationship of the considered alternatives to the organizations strategic objectives is essentially a qualitative assessment. How should qualitative factors be handled in the decision-making process? Firstly, they ‘must beidentified. Secondly, che decision maker should try to quantify them. Often, qualita factors are simply more difficule to quantify, bue not impossible. For example, possible unreliability of an outside supplier might be quantified as the probable number of days ae ‘multiplied by the labor cose of downtime in the plant. Furthermore, truly qualitative futon, such as the impact of late orders on customer relations, or che apple producers discomfort with the canning option, must be raken into consideration in the final step of the decision-making model—the selection of the alternative with the greatest overall benefit. Finally, employee morale can be affected either negatively or positively by decisions to offshore or reshore Product manufacturing or service delivery activities. The financial impact of such changesi ‘employee morale should be quantified to che extent possible and factored into the associated smake-orbuy decison. See Chapter Activ ty Reson parce Us ‘age Model and nd Tactleal Decision Mi on Malkin : Me What to do do with small, il-shaped apples ‘Step 7 seep 2 1. Sel 0 pi Pig farmers. 2'se 2 Sallbanged apes (ess) 3: Maks applesauce (esi) = 1. Make pie filling. Z 5. Continue dumping practice. Bagged erate or even: $130 per ba em toot petande orgie Applesece aterat Revenue 90.78 percan nena olen nas Step 3 Stop 4 Bagged: Differentiation ‘Applesauce: Forward integration Differentiation strategy ice: Discomfort with industrial value chain No knowledge of distribution channels Potential need for expert Potential unavailability of canning facility Bagged: Step 5 Applesau Step 6 Select bagging alternative because itis profitable and is more consistent with strategic posit joning desired by producer. Ford [An important sus sive for Ford Motor Company is ro increase the use of feeycled materials, renewable serials, and lightweight aerials “Alehough the costs and Heersfes of changing co a differene sour gn als are considered Ford also consis enter range of costs and benefits ae ample, using lightweight materials such as jluminum and magnesium, nand composice macerials May OF imay not be less expensive than the heavier-weight marerials they replace. Flowevet, Tower-weight materials significanely ro the veces ite rreonomy, aswell sro improved vreeleration and decreased stopping discanee ich are all imporeanc quality jmprovements in their vvchicles. ‘sustainable Materials at stainabilicy objec Exhibit 3.1 Decision Model: Tactical Decision: Making Process aa 12 opvective Eb RELEVANT cos’ Define the concept ‘vant csts In choosing Decision Making Chapter 3. Activity Resource Usage Model and Tactical Is and energy use re eo consider materials 2 derstand all che impacts Ov products and ye assess Interestingly, Ford uses life ‘ver the entire life ofa product, “We want 10 un ol services have, so that we can manage chem more effectively. To do ai wo a i: them holisialy over there if cycle. THB vie i mala 2 Feduc ou environmental footprint hough Tet sme a vaaesre andthe emisions generated By using BEM jis ae g tohep in choosing more en ET and alma ie xo Me them ose the ipa diflent power ket ce bo Fae and perforce over th ehice rife This analysis helps © ricle for their n« sods. 1 laa a one ie as to reduce the depletion of natural gecel "engetare geet (MS srg materi Fevexample upyeh onensune nde y a Ass A Tl an meri apis Kove a ema porta fe open ini sd. a ae fen pla ed Farcumple so bued foam uid 5 os uthigns and Backs reducing pelea age by oe 15 lio ponds USS FST eae fesed material alo helps Ford avoid the rola of pecan prices Naa fen = 2 aloe bad mx A ne compost pai Sia ring harnesses cmc with: eat in all, ay an jimporeant input into all of Ford’ vehicles. inane js asociat gunk Cos ‘Many esearch erncen rv aleraies, oly the cons and events (or benef) relevant othe Sanaa be considered. ening nd comparing icra me and revenues ae the ves dffcul ection cil econ mode iste in Exhibit 3.1, Relevant O00 (revenues) a Fo choose 0 ea fo ree) hae dle ars ata Since eleven een treated in money on thes aur con (rn cs wel sip the discon by concen oe A ticker, buc when Be re acd el fxr cos con be eleva. In addon i | cold and also ne: eins oer fom one acne to anthe Ia are om i the same for mon ha 4 ‘Skip the concerts cs ah hen eso the deco, Sch cox isan reas cose. The sly she concert ration: Ere evant and ielean cosa porn decon-making sil jovare honoring Ironey back regard Relevant Costs Illustrated ieemany other peo “oilluwrate the concep of elvan cout, consider Avicom, Ine a company chat mak § walle Te orcommercl sical A supplier ha approached the company and ofr a choot ro aendor 8 a apy ane offered a Iappiness just as 200 oe a che cg) fr wha apes ba ate Pee Se ee oe gecorttee md pe Penn peje oc en ol vole) sco ean? ca ature Costs Assume todiferent production dey {epee a pe ini esi crap ome Bore $4000 ofthese b rin nlp gin ie pd Thceostofprovidngp! ofter aeaifecoarse (S270 dacs the ier aeroe sndcoling he ple lle ‘rem emeiend 0 fr by emt rane (Need aps co mare inte feo Fo eae ame i de 5 produce dhe acl was $260,000 Adjusting this past cos ir eects rcment may charge} srondtd by the deion Ie ig i gr nck et Chapter 3 Activity Resourc tivity Res Resource Usage Model and Tactical ical Decision Making sated price increases produced the anvici ed is increases Produced the projected cox of $270,000. Although pat costs an ‘Opportunity costs represent anoth gas for predicting Faure co he net benefit sacificed or forgone her cxample of relevant costs Es eo eanty com i elerant becaue ties fare lew tee ever anher Therefore, snore cocan beds eden uae dha de ais ‘Keren Wh is cecats one ofthe highlights ofa student’ seatice 2 mimi: seat a0 fen Fe anne Meee re esd col cam 810000 aievant analysis should include aie dying abroad, chen ce etc of choosing to study abroad one $10,000 internship arnioge ss an oppredniey Irrelevant Cost Illustrated ‘Avicom uses machinery co manufacn Jl y facture nacelles. This mach ind has an annual depreciation cost of $ achinery was purchased five years ag0 je two alternatives? $50,000. Is depreciation a future cost chat differs nas past Costs A sunk cost isa past cost that has already occurred and can farfeation ofa cox already incurred, because no fuure decision ee ae cxghileor seca sar c emr e eSce cence org crete a pd al cost is avoidable. Thus, the acquisition ost of he machinery deprecation, none ofthe origin rr sssciated depreciation should not be 2 aetorin the make-or-buy decision ‘gunk Costs and Concert Attendance costs when making tactic ‘honor thei sunk cost, which ly because they have already spen past al decisions often ‘means chat earch studies illustrate thar ignoring sunk proves difficult. Many people feel a srongneed co Frey ehoose co spend fucure money on projects sm aan yn the same project. For example, assume that You purchase 2 advaneed concert anon) yc when the date ofthe concer arrives, you feel like You 06 coming down with 2 aera also need co study for an exam the following day ‘and, therefore, would prefer to Sip the concereand stay home to rest and seudy. Howers if you instead choose to attend Se pncert rationalizing cha “Thave ogo becatse) P<) slot of money on cis ieker’ then you are honoring Your sunk cost and Shaving ieraconally (i, you will no get your tekst yovey back regardless of whether you say 0 8 ‘the concert). While you can take comfore one other people in this scenario would behav ‘this same mannes, tis important £0 “ffecr such decisions should be avoided. ‘niéead, you should fealize that allowing sunk costs (08 gee to attend or Skip the concert based on “hich option maximizes your Facure wlity oF fappines usc asa company should choose he open chat maximizes is Furor profi Many re sts Assume that the cost dhe plane —$40,00 per yar—isallocased tion deparements, including the depart that prodiices nacelles, which wf 900 cos relevant co the make-r buy desi facing Avicom? jn i usc be paid in fucure yeas: Bue ici unlikely that the cost of heating edyced of not. Thus the cos is the ment allocated to the remaining Py but ce level ofthe cotal payment co heat and cool Future Cos to different pr 1 ves $4,000 of the cost. cis plant ues isa Frat cst ke-and-buy alcernatves ether nacelles af© P wane of che wility “The cost of providing does the cost differ across the m Sha cooling the plant will change wh an gcross both alternatives The 270 ss ements may change if producion is Phaffecced by the decision. Teis therefore an irrelevant cost 123 124 OBJECTIVE ER Explain how the activity Fesource usage mode! {s used in assessing relevancy. al Decision Making Model and Tactical Deck ivity Resource Usage Mod \VIOR, AND THE RELEVANCY, COST BEHA' ACTIVITY RESOURCE USAGE MODEL basic in determining relevancy. When €0S WETe pring Sr Understanding cose behavior i cera. When coms ae iranction berween Paed and var i ea anicicvel,bucvievel, product lve, and fciley lve gg Be eae har with respect co differenceypes of activity drivers, The acy fe Behavior of vous activity cons nd ap? The fese three are variable, can help us sort out ie decribed inch ollowingseieg Chapter 3 Act resource usage model relevance. TThe activity resoure ) lente eurces and 2 rawr and needed: Co cee sd thar setanet in lean Flexible Resources i ity. The amount paid for th csource spending isthe cost of acquiring activity capacity. Th P cm Fe eee ae ny coe Fr flexible resourses the resources demanded (sed) ee) the resources supplied. Thus, For this category, ifthe demand for an activity changes agus shernative, then resource spending will change and the cost of the activity is relevant to, ecto Frere ley ppd ineraly oes ol forthe pea Fle feaource. Consider the following wo alternatives: (1) accept a special, one-time order, o reject the special order. Ifaccepting the order increases the demand for kilowatt-hours (power, sedivity driver), shen the cost of power will differ across alternatives by the increas in fag consumption. Thus, power cost is relevant to the decision. Committed Resources Committed resources are acquired in advance of usage through implicit contracting, and are usually acquired in lumpy amounts. Consider an organization's employees: The imple, understanding may be that the organization will maintain employment levels even tho there may be temporary downeurns in the amount of an activity used, meaning that an acti ‘may have unused eapacity. Increased demand for an activity across alternatives may not mexy For example, assume a company has fv. increased cost—if there is sufficiene unused eapacit ‘manufacturing engineers who can each work 2,000 hours and earn $50,000 per yea; tou engineering capacity is 10,000 (5 X 2,000 hours) engineering hours. Suppose that this yex the company expects to use only 9,000 engineering hours for its normal business. This mean, thar the engineering activity has 1,000 hours of unused capacity. If there is a special ordey thae requires 500 engineering hours, che cost of enginecring would be irrelevant. The oda can be filled using unused engineering capacity, and the resource spending is the same for xh aleernative ($250,000 will be spene whether or not the order is accepted). However, ifa change in demand for the activity requires a change in resource supply, then the activity cose will be relevant to the decision, This change in cost ean occur in one of two ways (1) the demand for the resource exceeds the supply (increases resource spending), or (2) he demand forthe resource drops permanently and supply exceeds demand enough so that actviy capacity can be reduced (decreases resource spending). To illuscrate the first change, suppose that the special order requires 1,500 engineering houts. This exceeds the unused capacity of 1,000 hours. To meet the demand, the organization would need to hire a sixth engineer or perhaps use a consulting engineer. Either way, spending on engineering increases ifthe order is accepted; the cost of engineering is now a relevant cos. To illustrate the second type of change, suppose that the company could purchase 4 component used for production instead of making it in house. Recall chat 10,000 wapter 3 Activity Resourc cl taki Jsage Model and Tactical Ds aki cishon Making, gineering ours are avaiable and 9,000 ogi ,000 are used. Ifthe gemini hour wl rp fom 20 component is purchased, then the Scene eres ras nga ce on easing the engineer 0 another plant where the servets arc ind eee we ure up eed 8.00 hou Eng see wal fey one [ny for one engineer) across the make-or-buy alternatives, This cost ae Cees igineer) the make-or-buy alternatives. "This cos is then mitted resources are acqui quired in advance for multiple periods-—before 1g a building is an example. Buying an annual of engi Fither © $50,000 (th Feat 00 ‘Ofeen, comn one demands ate known. Leasing or bi seid aceity capacity soften done by paying es ae nay be recognized, but no Ruin geT itoacee bending needed. Up feource spending i 8 sunk cos, aches Enea PGE soto pene nae eee cedar af eeu age Even fa permanent reduction of easing, is essentially desi (gage is experienced, its difficult o reduce resource spending because of formal ae peractual commitments sactesample, assume a company leases a plant for $100,000 per y capable of producing 20,000 units ofa product—the level eer ‘when demand for che product drops and the plant needs to produce only mene of $100,000 mst still be paid even though id that demand increases beyond the 20,000-unit Teasing an addieional plant. Here, resource jon, however, co acquite long-term activity involving multiperiod capabilities ibie 3.2 summarizes the Bes car for 10 years. The qrsed. Afer five years the Eee red units cach year. The annual lease pay produced have decreased. Suppose insta sepliy. The company may consider buying or seeding cold change actos alternatives The dei ire cc ashore-cerm or small-scale decision. Decisions is ot escment decisions and are covered in Chapter 5. Exhil tiage model’ role in assessing relevancy. capaci axe capital i rm Bookstores rears, Once a meeting place for book Technology and Big Data Transfo ‘The cooner bookstore has evolved throughout the ¥ ove kepe a carefully curated list of cies on hands Ifa customer wanted Sr he book store ordered it, and several days laren. it Wit available, OF Spek Amazon.com nearly put an end o that mode aa dhe comer bookstore. The Espresso Book Machine one sfa large photocopier and connected co the Jes. The resulting book tovers, the 1 book not ia st course, big-box stores an “Technology has bro 1s books on demani jught n .d. About the si prin print oie Eapresto machine hes acces 9 abou! #8 million he ees chat own Eareso machines can soceesd Wh "The inventory of books on js ready in about i taparacively small footprint, perhaps Js. 2,000 square feet. compe much smaller, with only one oF £0 SOP of many books instead of 10 co 12. This pack on overordcring and then revurhihg sold books to the publishes In esenec, ac iow the bookstores 0 offer books for ‘the “Jong rail’ —the relatively few ot class popular oF long out of-eOPYTIERE books, such as Nikolai Gogol’ int Is Shakespeare Dead? 1 self-publish books. Families sinting on demand is the ability Or scores, printing off limited number of copies ‘bookstore remains a viable business model. alsoc the machi readers who want [Lost Souls or Mark Twa “A furcher advancage ofp an put together family albums 2n oem “The resule is that the corner! Tatts A Trace seve The Wil ret orm (N20 2016) FST Hw Teh te nPaE ‘he al Sree Journal pi-b2. Exhibit 3.2 Resource Demand and supe ossecrive Eb Apply the tactical Chapter 3. Activity Resource Usage Model and Tactical Decision Making Flexible Supply = Demand a. Demand changes aL Relevant b. Demand constant b. Not relevant Committed Supply ~ Demand = Unused capacity a, Demand increase < Unused capacity a, Not relevant . Demand increase > Unused capacity _b. Relevant «Demand decrease (permanent) - > 1. Activity capacity reduced 1. Relevant 2. Activity capacity unchanged. 2. Not relevant ILLUSTRATIVE EXAMPLES OF TACTICAL DECISION MAKING The activity resource usage model and the conee pt of relevancy are valuable tools in tactical dee ns Ie is important to see how they are used to solve a variety of rae Applications include decisions ro make or buy a component, to keep or drop 4 seg Product ine to accep or jee special oder ates than he ul price, and og roduc further or ell iat th spliff point. Of course this is noc an exhausivelin Th deinion-making principles canbe applied to other sextings. Once you see how day ists ncoapy han nay ppp ing nang ce ae assume that the first two steps of the tactical decision-making model (see Exhibit 3) already been performed. Thus, the emphasis son tacteal cost analysis. ee Make-or-Buy Decisions Organizations often face make-or-buy decisions—a decision of whether to mal bar components or services used in making a product or providing a service, For te physician can buy laboratory tests from exzeral supplier (hospitals or for prof or these lab cests can be done internally Similacy, 3 comp dikes hyn be bought fom exeral mpl ‘ Outsourcing of technical and professional jobs has become an importane m incl Outpohaciag fer rhe ihecatat of batten Reon eee ae the ate company ocd ose ofthe cunty. the station eed oa Over she past few decades, many companies have offthored key business func atrempt to ct costs, Inceresingly, large orton of such companies have ubseuenang to reverse this decision through reshoring, which refers tothe return of previo ohn business functions co the original country of origin. yuter manufacturer can mle ing While produce oursourcing receives significant attention, some companies outsouge services. In addition, many ofthese outsourced services are bffshored to varius cous around the world, such a8 India. For example, companies such as Dell, Barclays, Oak and General Electric have offthored their call cencer activities, including eustomer emia and technical suppor, in an attempt to generate cost savings, However, as many compa have learned, offshoring opporcunicies should be studied carefully beforehand wis a thorough relevant analysis to be sure that the major relevant costs have been idenaied and adequately quantified. Some companies have been unpleasantly surprised after mnap forward with offshoring to learn that they had significantly overestimated the benefits underestimated the costs of heir offshoring endeavors, Chapter 3 A ctivity Resource U ‘sage Model and ractical Decision Making 8 127 yualiracive considerations are Amporeane in th ein many companies have found d outsourcing decision, Time isa Ee er cage ound tht laa rss ied seen alee ce Seaes provide beter customer service TEE ae ee Trend nove gun may a0 get help froma econ lin-busedcemet, On the negedve thd, the polideal eal Senees ba et an ies heer seer aoe eumist po needs il get help fr pesurcing, with its ovet ude an ig assume that outsourcing the production of a ipsatere ha poirpaarie Ce en antel oe Goa Methy decided not co outsource the pare production (i pect aaa eae ec he S25 peeuni forgone profi would represent spelen ae oak the pare and shouldbe faccored ino the make orb ee ne come u ma ee differentiation strategies. Making instead of buying (or vice eae a lesen Ber cow of producing the ma product. Altratively, chosing» ak ox bay maybe fel to ase erp TF oduct (diftereniating on the bas of quality) on rad hi e range make-or-buy decision. y cs of Pare 34B, used in one ofits snow- ier has offered to supply the pare for ‘The HOW ] ie and WHY of | Structuring @ 240 i Make-or-Buy Decision jer engines, 54.75. The unic costs: Pare 34B fequites 30,000 oral unic cost 2 ad is applied on che basis of fachine hours: 1 focus on relevane costs and c-or-buy situation requires the company © Trcic The problem is setup with cron cont and benefits organized under column headings rt Me diference becween the alernasives BS for each alrernati the quanctative vaneage © each alternative, disadvantage for ves for Talmadge Company? ‘of the'fixed. cosets avoidable. 1c cost(s) of Sind of exceenal purchase: jgrndre cose effective and PY how much? fed overhead is supervision for Pare 34B that is av ¥ ine is mare cost effective: ‘and by how much? il . 2 Which aleernas Lise the relevant “Assume that none 3, Which alternadh | what if $60,000 081 © cheparcis purchased 128 Chapter 3. Activity Resource Usage Model and Tactical Decision Making "Solution: 2 (Continued) 1. The aleernasives are to make the part in House Of 2. The elevanc costs of making che part ate di factory oveshead. The selevane cos of BOVINE } 3. cas casei Lee mseee Direct materials Direct labor 240,000 Variable overhead 90,000 0 Purchase price 0 475;000' « Toul ‘$580,000 $475,000" * Make Buy Dwectmatcrals, $5000.58 © Diect labor ~ 240,000 ; Variable oveshead 90,000. Supervision Cost Analysis: Activity-Based Cost Management Syst. problem also can be illustrated in an activity-based costing fen That = = ructute ory problem isthe same as that shown in Example 3.1: however typically the relevancoa pov exeniv ander muse ake determine which eae lean ae ow much To illustrate the ABC analysis for Talmadge Company's Part il dann Exhibit 3.3 along ih che dt om Example Al scaeeyapecent a cst penis Thee ofproviing pence anna plan depron popes tes and anoal msntnance, This cot iallocted tthe products based ont feccfapc cco yt roduc poco equipment, The varie com aoa coh pce the et ofl our The ed cox comport oy he cot of commistedresouress acquied in advance of wage. Units of purchase ecg, ine ame medi fog trope example, ifmore capacity for mov i Sein ifmore capacie for moving materials needed, i must be bought in lamp nun Chapter 3 Activ ree Usage ston Making, narce U Model and Tact ‘al Decision Activity Cost Formul so . $0 $20,01 $250,000 eS Sen 31:50 so $971,000, mer $120,000 Machine hours Lines Number of moves Inspection hours setup hours Square feet Units 1 3 25,000 2,000 2,000 ion 50,000 Depreciat some Difference 50,000 240,000 90,000 60,000 49,000 38,000 660,000 Dircee materials Direct labor Providing Powe? Providing supervision Moving macerials Inspecting product Sercing up equipment Purchase pri Tous (475,000) 475,000 $112,000 $475,000 ip Talmadge buys Pare 343 instead of making it resource usage decreases for cach of the cnvices Lets review them. Direct , direct labor, an are dential v0 chose caevlared in ‘Example 3. Direct maverals = $0.50 X 100,000 ur © $50,000 Direce labor = $240 X 100,000 unis = $240,000 Power = $0.90 X 100,000 units = $90,000 ice and must be acquired in units of three ition is a lumpy resou react ehree lines, the amount ‘of supervision ne power ar sscl varale and thelr amount and costs Supervi ines. Since the making of Pare 34B sequlte ceded Is $60,000 ($20,000 3 ines) Moving. ‘materials and ins| variable and a fixed amount ‘Moving macerials pecting product are 2 ie more complicated since there if otal moves)(25:000) = (§250,000/250.000 “(0.60 x 40,000 moves) = $49,000 129 Exhibit 3.3 Activity and Cost Information 1a Tal Beso Making, Inpsing rede = (240000/16500 9a pcos hn * ($150 «2.00 npecon ous ame ‘euch i Ab 1 eect oe th id sn nd wi Pe 348 eeu Soe e eo (Rong conteredce deed on te oa pe ose men at ‘cloning Sr ageing as bythe limpy amount othe units hee must be perched at once Tae a ‘source pending sociated wilh Pre 348 ete smoune of ever ata syd ‘on coma, Fo ‘hepa mes sharbe e ~ Naga cong bee one Seng augments vale with epee othe be of votes Te omelet are Shes 000 ep hours ane ates S10 ve pet setup hou the produc egies [Notice that providing space and equipment deprecation ae ignored. ierelevan cons, They wil remain the same in total no matter whether te lnceraly or purchased externally. ‘As we can se, the adcional information provide by activity bated co teen et Deg en coe eval eos A054 “sha ge ese a saane ‘hans osha purchasing the prs beter The company wl soe gta SEs em ifthe pati bought cxernally Of ours chi jn the quanti maken ener

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