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.