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OCS Set 1 (One Question Exam) - Nov 2025

From: Marcus Greene, Finance Director
To: Finance Officer
Subject: Budget, Outsourcing, and Retail Order

Hi,

Diogo, our Production Director, has raised concerns about the handling of ski components (wood cores, composites, and sidewalls) as they move into assembly at the Gornegraten facility. Components are not always reaching the assembly stations quickly enough, which has led to production delays and idle time for assembly staff. He suspects that the budget allocated to the Goods Inwards and Handling function is too low.

I've suggested that we reconsider the budget for this area using a zero-based budgeting (ZBB) approach. Currently, the budget covers two small handling carts and two operatives who move components from the storage area into the prep and assembly stations. Other than these carts, there is no automated equipment for transporting heavier materials such as bamboo or maple planks.

Secondly, we are assessing the option of outsourcing part of the ski base grinding and finishing process to a specialist supplier in Reeland. Two companies offer this service at the same price per ski. Initial checks suggest they are financially stable and of similar size.

On another matter, Elena has been negotiating with a large international retail chain that wants 500 pairs of our SummitForce skis (advanced freestyle range) as an exclusive promotional order. She believes this could lead to repeat business if successful. The chain, however, is pushing for a price lower than our full cost. I've attached a cost schedule for this order.

Please prepare a briefing paper that I can send to Trey which:

• Explains how a ZBB approach should be applied to create a budget for the Goods Inwards and Handling function, in order to improve operational efficiency. (Sub Task = 36%)

• Describes the advantages and disadvantages of outsourcing the ski base grinding and finishing process rather than carrying it out in-house. (Sub Task = 28%)

• Explains whether each of the costs on the attached schedule are relevant or irrelevant to the decision of whether to accept the retail chain's order. (Sub Task = 36%)

Attachment: Costs associated with the potential retail order (500 pairs of SummitForce skis)

Cost item	Note	Total cost
Bamboo & Maple wood cores	1	R$45,000
Composites & materials	2	R$38,000
Direct labour	3	R$32,000
Total production overheads	4	R$54,000
Additional costs	5	R$27,000
Total cost		R$196,000

Notes:

1. The R$45,000 is based on 90kg of bamboo and maple wood cores that were purchased two years ago for a discontinued ski line. We still hold 800kg in inventory. If not used, these could be sold to another small ski maker for R$30 per kg. Current purchase price would be R$65 per kg.

2. The R$38,000 reflects standard costs of composites and resin, all currently used in normal production. Prices have recently risen.

3. Direct labour of R$32,000 is based on standard rates. Staff are paid fixed weekly wages, but 30% of this order would require overtime at a 40% premium.

4. Overheads of R$54,000 include absorbed fixed costs as well as variable costs.

5. The retail chain requires their logo and eco-label to be printed on skis, which means leasing a specialist laser-print machine for R$20,000. Travel expenses of R$7,000 were also incurred by Elena to negotiate the deal.

Report - ZBB approach, outsourcing and relevant and irrelevant cost

1) ZBB approach for Goods Inwards and Handling function

First, ZBB is a budget model with a zero starting point. This method is a non-conventional system, because the company needs resources invest and time to implement. For Goods Inwards and Handling department could be an efficient budget because as we can see, the budget is not sufficient for this department.

My recommendation is to follow the next steps in order to implement the ZBB budget:

• Identify the main areas from Goods Inward and Handling (by example: people from the department, machine used, etc). As you mentioned, we have only two handling carts and two operatives. We can start from what we have and to identify what we need (it's a zero based budget, from where the history is not considered)

• Allocate the cost for our needs in goods inward and handling (the cost for the people we need, the cost of machines and the maintenance cost for this equipment).

• Implement an approval process (because we start from zero, no history, now we can implement an approval process for all the budgeting expenses).

2) Advantages and disadvantages of outsourcing ski base grinding and finishing process - rather than in-house

Outsourcing is a modern approach, especially for the large company who want to explore the possibility of outsourcing functions in order to increase the efficiency.

To be more clear we have the following advantages:

• Management (Diego and also James, Leigh from Assembly and Finishing) can focus on strategic parts not into day-to-day operational tasks

• For long term perspective, the cost can be an advantage, because the labour using in outsourcing can be different by in-house approach

• We can negotiate every time the contractual terms with suppliers (conditions, change of supplier). So we are not stuck with only one possibility

But also we have disadvantages:

• Once we choose to go with outsourcing, it's difficult then to come back to in-house.

• In Grinding we focus on quality (by example, excess resin is cut away, etc). If we use outsourcing, we need to be aware of quality issues that can occur if the suppliers do not meet the quality criteria

• Even we said as advantage that Diego, James, Leigh, etc, can focus on strategic parts, but can be risk of control (because the day-to-day operational tasks run actually the business)

3) Relevant and irrelevant costs

Bamboo & Maple wood cores: relevant cost. Here we need to have a split → what is out of stock (it only the purchasing price) → what is in stock (relevant costs is replacement cost and NRV). In this situation, we have 800 kg in stock, this needs to be evaluated at selling price - 30 $/kg = 90 x 30 $ = 2,700 $. 65 $ / kg is used only if we don't have on stock and need to additional purchase.

Composites & materials: not relevant for standard cost if we use in current production. For relevant cost we need to take into consideration the rising in price and if is an incremental cost (additional to our production) then is a relevant cost. 38,000 $

Direct labour: if we have spare capacity the relevant cost is zero. In this situation we don't have spare capacity (the people need overtime to fulfill the order and in this case the relevant cost will be the overtime required). In this situation: 40% will be a premium overtime from 30% from this order.

Total production overheads: 54,000 included fixed and variable. In relevant cost we don't need to consider fixed overheads who normally occurs.

Additional costs: relevant cost = 20,000 only.