Climate-Control, Inc., manufactures a variety of heating and air-conditioning un

Question

Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $34 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:

Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount.Omit the "$" sign in your response.)

Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $132,280 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $34 each?

Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $34 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:

Explanation / Answer

Managerial accounting is concerned with providing information to managers- that is, to those who are inside an organization and who direct and control its operations. Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors and others who are outside an organization (Garrison and Noreen, 1999).

Managerial accounting information include:

Information on the costs of an organization%u2019s products and services.

For Example, managers can use product costs to guide the setting of selling prices. In addition, these product costs are used for inventory valuation and income determination (Horngren and Foster, pp. 2).

Budgets.

A budget is a quantitave expression of a plan.

Performance reports:

These reports often consist of comparisons of budgets with actual results. The deviations of actual results from budget are called variances (Horngren and Foster, pp. 3)

Other information which assist managers in their planning and control activities.

Examples are information on revenues of an organization%u2019s products and services, sales back logs, unit quantities and demands on capacity resources (Kaplan and Atkinson, pp. 1).

Managerial Accounting Practices

Traditional managerial accounting systems are mainly designed to measure the efficiency of internal processes. In the 1980%u2019s, traditional managerial accounting practitioners were heavily critized on the grounds that their practices had changed little over the preceding 60 years, despite radical changes in the business environment. For more information on traditional managerial accounting practices see the Traditional Managerial Accounting page.

The last decades new managerial accounting practices such as activity-based-costing, the balanced scorecard and bottleneck accounting were developped:

Unlike traditional managerial accounting, activity-based-costing deemphasizes direct labor or raw material as cost drivers and concentrates instead on activities (e.g. the number of production runs per month) that drive costs. Activity-based costing gives the management of an organization a clear picture of the cost drivers and the opportunities to reduce costs (Kaplan and Norton, 2001, pp. 378). For more information on activity based costing, see the Activity Based Costing page.

Traditionally, management accountants%u2019 principal performance report was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs and revenues during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with other performance reports such as the balanced scorecard. A balanced scorecard is a set of financial measures, operational measures on customer satisfaction, internal processes and the organization's innovation and improvement activities (Kaplan and Norton, 1992). Kaplan and Norton also argue that the balanced scorecard can be used as a strategic management system which identifies the value drivers of an organization's strategy and a management system to align the organization to the strategy (Kaplan and Norton, 2001, pp. 378).

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