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Financing and cost accounting

4.3 Dealing with scarce resources

Step 1: identify the bottleneck constraint

Step 2: calculate the contribution per unit for each product

Step 3: calculate the contribution per unit of the bottleneck resource for each
product

Step 4: rank the products in order of the contribution per unit of the bottleneck
resource

Step 5: allocate resources using this ranking.

4.4 Make or buy decisions

A product should be made in-house if the relevant cost of making the
product in-house is less than the cost of buying the product externally.

Spare capacity exists

Unless stated otherwise in the question, it should be assumed that there is spare
capacity.

No spare capacity exists

The relevant cost of making the product in-house = the variable cost of internal
manufacture plus any fixed costs directly related to that product.

The relevant cost of making the product in-house = the variable cost of internal
manufacture plus any fixed costs directly related to that product plus the opportunity
cost of internal manufacture (e.g. lost contribution from another product).

Illustrations and further practice

Now try TYU question 7.

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