Certificate in Accounting and Finance Stage Examination

The Institute of 8 September 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Centaurus Limited (CL) is engaged in the business of manufacture and supply of leather
jackets. Presently CL manufactures 30,000 jackets per month. Following information is
available for the month of August 2022:

Number of skilled workers 350

Standard monthly hours per worker 200
Standard hours per unit 3
Normal wage rate per hour Rs. 150
Overtime wage rate per hour Rs. 250
Variable overhead rate per hour Rs. 120

In order to reduce the conversion cost, CL’s management is evaluating the following two
wage incentive plans:

Option 1: Introduce a piece wage system at the rate of Rs. 500 per unit. This is expected to
make workers 15% more efficient.

Option 2: Introduce a bonus of Rs. 50 per unit if a unit is completed within 90% of the
standard time. It is expected that after introduction of bonus, 70% units will be completed
within 90% of the standard time.

Required:
Evaluate the above options and advise the most beneficial option. (08)

Q.2 Saturn Limited (SL) imports raw material M-1 for manufacturing of its products. Following
data relating to M-1 has been extracted from SL’s latest records:

Maximum usage in a month units 5000

Minimum usage in a month units 3000
Average consumption in a month units 3750
Maximum lead time months 4
Minimum lead time months 2

Required:
(a) Briefly explain the meaning of ‘Lead time’ and ‘Stock out costs’. (03)
(b) Compute the following with brief explanation of why it is necessary for SL to maintain
these levels of inventories:
(i) Reorder level
(ii) Maximum inventory level
(iii) Safety stock level (05)
Q.3 Pluto Limited (PL) manufactures a single product ZAA and operates at a normal capacity of
45,000 machine hours per annum which is 90% of its full capacity. Each unit requires one
machine hour. PL uses absorption costingmethod to manage its costs. Following information
has been extracted from PL’s prior year’s records:
Actual production 44,000 units
Under absorbed overheads Rs. 420,000
Fixed overhead absorption rate Rs. 200 per machine hour

PL has a policy of revising its fixed overhead absorption rate for each year on the basis of
prior year’s actual fixed overheads. During the current year, following events took place:
(i) There was an unexpected increase in demand of ZAA due to which PL utilized its
excess production capacity to manufacture maximum units of ZAA. Further, factory
workers were paid overtime of Rs. 1.2 million for additional hours worked during the
year.
(ii) The government announced an increase in taxes on electricity which increased PL’s
cost by Rs. 300,000.
(iii) Due to a mechanical fault there was a machine breakdown which had to be repaired at
a cost of Rs. 3 million. PL received insurance claim of Rs. 2.8 million against the
machine breakdown.

Required:
(a) For each of the above events, briefly explain whether they would independently result
in over/under absorbed overheads. (03)
(b) Compute the budgeted and actual fixed overheads of prior year and current year.
Assume that there was no other increase/decrease in fixed overheads other than those
mentioned above. (07)

Q.4 (a) List any two examples of bases for absorption of factory overheads. Also briefly discuss
how a base should be selected. (02)

(b) Venus Limited (VL) is a manufacturer of consumer goods. Below are the details related
to overheads of its production department for the year:

Total machine hours available (2500 hours per machine) 7,500

Machine maintenance hours (150 hours per machine) 450
Departmental overhead absorption rate per productive machine hour Rs. 850

The management of VL has decided to replace one of its existing machines having zero
book value with a new machine which will cost Rs. 1,200,000 and has a useful life of
10 years. The machine will be available for use from the beginning of next year and is
expected to run for 2,500 hours during the next year including:
(i) 80 hours for setting up the machine; and
(ii) 110 hours for machine maintenance.

The estimated overheads for the year related to the new machine are given below:

Electricity consumption per hour Rs. 180

Annual maintenance cost Rs. 200,000
Indirect labour cost Rs. 50,000

It has also been decided that from the beginning of next year, one of the managers from
another department will be moved to the production department for monitoring the line
efficiency. The manager’s salary is Rs. 30,000 per month.
 Required:
Compute the revised overhead absorption rate for the production department for the
next year. (06)

Q.5 Galaxy Limited (GL) is engaged in trading various consumer goods including Star-1 for
which demand is evenly distributed throughout the year. The present supplier of Star-1 offers
a bulk purchase discount of 5% on all orders of 20,000 units and above, which GL has been
availing. Due to availing the bulk discount, the normal transit loss has been increased from
3% to 4%.

GL is currently evaluating to adopt economic order quantity (EOQ) model which would
reduce the transit loss to 3%.

Following information has been gathered for the purpose of evaluation:

Average annual demand Units 120,000

Safety stock Units 1,200
Per unit purchase cost Rs. 250
Ordering cost per order Rs. 50,000
Average annual holding cost per unit Rs. 100

Required:
Advise GL whether it will be beneficial to adopt EOQ model. (10)

Q.6 Uranus Limited (UL) manufactures and sells two products, X1 and Y1. Following is the latest
information pertaining to X1 and Y1:

X1 Y1
---------- Units ----------
Sales volume 5000 2500
--------- Rupees ---------
Selling price per unit 4,400 2,200
Variable cost per unit 3,000 1,500
Fixed factory overheads 5,400,000
Fixed selling and distribution overheads 4,500,000

UL’s finance director has suggested that sales of X1 can be increased by spending
Rs. 300,000 on advertisement and reducing selling price by 5%. Sales volume of X1 is
expected to increase by 20% as a result of adopting his suggestions.

Required:
(a) Compute the existing overall break-even sales revenue and margin of safety units. (05)
(b) Advise UL whether it should go ahead with his suggestions or not. (02)
 Section B

Q.7 Mars Limited (ML) blends and markets a specialised chemical and has two production
processes, A and B. In process A, two joint products, Comet and G-1 are produced and
incidental to their production, a by-product String is also manufactured. G-1 is further
processed in process B and converted into a new product Gravity. Following information has
been extracted for the month of August 2022:
Process A Process B
Remarks
------ Rs. in '000 ------
Costs
Direct material 9,600 - 9000 litres were added at the beginning
of the process.
Conversion costs 4,500 2,000 Conversion costs are incurred evenly
throughout the process.
Output --------- Litres ---------
Comet 3500 - Sold for Rs. 1,500 per litre after incurring
packing cost of Rs. 120 per litre.
G-1 4000 - Transferred to process B for conversion
into Gravity.
String 1000 - Sold at split-off point for Rs. 600 per litre.
Gravity 4000 Sold for Rs. 2,200 per litre after incurring
packing cost of Rs. 140 per litre.
Opening work in process 800 - 60% complete as to conversion.
Closing work in process 950 - 80% complete as to conversion.

Additional information:
(i) Cost of opening work in process is Rs. 1,500,000 which comprises of 60% material cost
and 40% conversion cost.
(ii) Normal loss in process A is estimated at 10% of the input and is incurred at the end of
the process (Inspection Stage). The rejected quantity from process A is sold for Rs. 200
per litre. No loss is incurred in process B.
(iii) Proceeds from sale of by-product String are treated as reduction in joint costs. Joint
costs are allocated on the basis of net realizable values of the joint products at the
split-off point.
(iv) ML uses weighted average method for inventory valuation.
Required:
(a) Prepare quantity schedule and equivalent production schedule of process A. (05)
(b) Compute cost per litre of Comet and Gravity. (08)
(c) Prepare accounting entries to record production gain/loss of process A for the month. (03)

Q.8 Neptune Limited (NL) is engaged in the production of a single product Lunar-1 and uses
standard absorption costing system. NL has total production capacity of 6,250 units
per month whereas it operates at a normal capacity of 80%. Following information pertains
to the month of August 2022:
Standard cost card per unit:
Rupees
Direct material (8 kg at Rs. 30 per kg) 240
Direct labour (6 hours at Rs. 25 per hour) 150
Overheads* (Rs. 20 per labour hour) 120
*include budgeted fixed overheads of Rs. 200,000.
Sales and production data:
Budgeted selling price per unit Rs. 700
Budgeted sales Units 4,000
Actual sales Units 5,200
Actual production Units 5,400
 Additional information:
(i) There was no inventory at the beginning of the month.
(ii) 50,000 kg direct material was purchased in bulk in order to avail discount of
Rs. 150,000.
(iii) Actual material loss was 10% as against the budgeted loss of 6%.
(iv) Workers’ wages were increased by 10% effective from 1 August 2022 due to prevailing
high inflation. This increased workers’ efficiency by 5% as compared to the budget.
(v) Actual overheads (both fixed and variable) amounted to Rs. 720,000. Fixed overheads
were over absorbed by Rs. 30,000.

Required:
(a) Compute the budgeted profit for the month of August 2022 using standard marginal
costing. (05)
(b) Compute the following variances for the month of August 2022:
(i) Sales volume variance (ii) Material price and usage variances
(iii) Labour rate and efficiency variances (iv) Fixed overhead expenditure variance
(v) Variable overhead expenditure and efficiency variances (14)

Q.9 (a) Jupiter Limited (JL) is engaged in the production of three products L1, L2 and L3 whichit
sells in the local market. Presently, JL’s manufacturing plant is operating at 80% of its
capacity. Following information has been extracted from JL’s records for the year
ended 31 August 2022:
L1 L2 L3
Production/sales (units) 3,500 6,000 7,000
Machine hours per unit (hours) 8 5 6
------------- Rupees -------------
Selling price per unit 6,200 5,000 7,000
Variable cost per unit
Direct material 900 600 1,000
Direct labour 800 750 1400
Variable overheads 600 700 600
Fixed overheads 8,250,000

In order to enter into the international market, on 1 August, 2022, JL hires the services
of an export house to market its products, at a monthly payment of Rs. 100,000. JL
resultantly receives first export order from a USA based company, Asteroid Limited.
Details of the export order are as follows:

Selling price per unit

Product Units
PKR equivalent
L1 1,200 6,500
L2 1,500 5,200
L3 1,800 7,400

It is estimated that due to additional packaging, the direct material cost will increase by
10% and due to quality control, other variable overheads will increase by 15%.
A toll manufacturer offers JL to produce L1, L2 and L3 at Rs. 1,800, Rs. 1,600 and
Rs. 2,500 respectively subject to provision of material by JL.

The management has decided to produce local orders on priority.

Required:
Prepare a product wise plan for in-house production and outsourcing to maximize JL's
profitability for the upcoming year. (10)
(b) Briefly discuss any four non-financial considerations that are often relevant to an
outsourcing decision. (04)
(THE END)
 A.1 Centaurus Limited
Conversion cost under existing scheme: Rupees
Labour cost - Normal hours 70,000(W-1) ×150 10,500,000
- Overtime hours 20,000(W-3) ×250 5,000,000
Variable overheads 90,000(W-2) ×120 10,800,000
Total conversion cost 26,300,000

Conversion cost under option 1:

Labour cost 30,000×500 15,000,000
Variable overheads 76,500(W-4) ×120 9,180,000
Total conversion cost 24,180,000

Conversion cost under option 2:

Labour cost - Normal hours 70,000(W-1) ×150 10,500,000
(83,700(W-5)–70,000(W-1))
- overtime hours ×250 3,425,000
Bonus 30,000×70%×50 1,050,000
Variable overheads 83,700(W-5) ×120 10,044,000
Total conversion cost 25,019,000

W-1: Hours
Available standard labour hours 350×200 70,000

W-2:
Labour hours required under existing scheme 3×30,000 90,000

W-3:
Overtime hours under existing scheme 90,000(W-2)–70,000(W-1) 20,000

W-4:
Labour hours required under option 1 [90,000(W-2) × 85%] 76,500

W-5:
Labour hours required under option 2 - at 90% 30,000×3×70%×90%
time 56,700
30,000×3×30%
- at normal time 27,000
83,700

Conclusion:
Option 1 is the best because the cost is lowest under this option.
A.2 Saturn limited
a)
i. Lead time is the time period between placing an order and receiving the delivery.

ii. Stock-out cost is the opportunity cost of running out of stock.

Stock-out occurs when there is demand but no stock is available. Therefore, it is the loss of profit,
which could be earned had the stock been available.
It also leads to loss of customers’ goodwill as the customers may move to the products of
competitors. If the customer is permanently lost, the stock-out cost is determined using the loss
of future contribution as well.
(b)
(i) Reorder level:
This ensures that inventory level does not fall below the minimum inventory level in order to
avoid the stock out cost.
Max. demand x Max. lead time
5,000 x 4 = 20,000
(ii) Maximum Inventory Level:
SL should not hold inventory level above this level as it will incur extra holding costs
withoutadding any benefit to the company.
[Reorder level – (Minimum demand x Min. lead time) + Reorder
quantity][20,000 – (3,000 x 2) + Reorder quantity (Not available)
(iii)Safety stock:
SL should maintain safety stock in case the demand during lead time exceeds expectations or
there is a delay in the expected delivery time.

Max. demand x Max. lead time 20,000

(5,000 x 4)
Average demand x Avg. Lead time (11,250)
[3,750 x 3 (4 + 2) ÷ 2]
Safety stock 8,750
A.3 Pluto Limited
(a) (i) Utilization of excess production capacity will lead to an increase in number of actual
machine hours. Since overheads are applied on the basis of machine hours, this will lead
to over absorption of factory overheads
Overtime paid to factory workers will have no effect because it is a variable direct cost
and not a part of labor overheads.
(ii) Increase in taxes will lead to an increase in actual electricity cost which will lead to under
absorbed overheads.
(iii) The repair cost was unforeseen; therefore, it could not be included in the budgeted repair
cost. This lead to under absorbed overheads (because of increase in actual overhead).
However, overhead will be under absorbed by 0.2 million (3-2.8).

(b)
Prior year
Rupees
Budgeted fixed overheads 9,000,000
(45,000 x 200)
Applied overheads 8,800,000
(44,000 x 1 x 200)
Add: (Over)/under absorbed OH 420,000
Actual OH 9,220,000

Current year
Rupees
Budgeted fixed overheads 9,220,000
(From prior year)
Increase in electricity cost 300,000
Repair cost for machine breakdown (3,000,000 – 2,800,000) 200,000
Actual OH 9,720,000
 A.4 Venus Limited
(a) Examples of bases of absorption
(i) Machine hours
(ii) Direct labour hours
(iii) Physical output
(iv) Direct material cost
(v) Prime cost
(vi) Direct labour cost

The base selection depends on the nature of business and it may vary from company to
company, department to department and one cost center to the other.
Rupees
Existing budgeted overheads [850× (7,500–450)] 5,992,500
(b) Increase/(decrease) in departmental cost:
Depreciation of new machine 1,200,000/10 120,000
Electricity 180× (2,500–80-110) 415,800
Maintenance cost (given) 200,000
Indirect labour (given) 50,000
Production line manager 30,000×12 360,000
Less: Existing overheads of the machine being replaced
[{850× (7,500-450)}/3] (1,997,500)
Revised budgeted overheads 5,140,800

Hours
Existing budgeted hours 7,500–450 7,050
Add: Budgeted hours of new machine 2,500–80–110 2,310
Less: Budgeted hours of old machine 7,050/3 (2,350)
Revised budgeted hours 7,010

Rupees
Revised overhead absorption rate 5,140,800/7,010 733.35
A-5: Galaxy Limited
Cost under Existing Situation (Order size 20,000 units)
Purchase Cost = 29,687,500
[125,000 (120,000/0.96) x 250 x 95%]
Annual Ordering Cost = 312,500
[125,000/20,000 x 50,000]
Annual Holding Cost = 1,120,000
[20,000/2 + 1,200] x 100
Total = 31,120,000

Cost under EOQ:

Purchase Cost = 30,927,750

[123,711 (120,000/0.97) x 250]
Annual Ordering Cost = 556,104
[123,711/11,123 (W-1) x 50,000]
Annual holding cost = 676,150
[11,123/2 + 1,200] x 100
Total = 32,160,004

Conclusion: GL should continue to purchase in bulk as total cost is lower under that option.

2 𝑥 50,000 𝑥 123,711
W-1: EOQ = √
100

= 11,123 units.
A.6

a. Breakeven Sales Revenue:

𝑻𝒐𝒕𝒐𝒍 𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕
=
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒃𝒂𝒄𝒕𝒉

[5,400,000+4,500,000
= 3,500
= 9,000,000/3,500 = 2,899 batches

X1= 2,829 x 2 = 5,658 units x 4,400 = 24,895,200

Y2= 2,829 x 1 = 2,829 units x 2,200 = 6,223,800

Total 31,119,000

Margin of Safety Units:

X1 Y1
Budgeted Sales 5,000 2,500
Breakeven Sales (5,658) (2,829)
Margin of safety (659) (329)
W-1) Contribution per Unit:

X1 Y1
Sale price per unit 4,400 2,200
Variable cost per unit (3,000) (1,500)
Contribution per Unit 1,400 700
X1 Y1 Total
Units 5,00 2,50 7,500
0 0
Sales mix 2 1

a) Existing Profit/loss:
Contribution 8,750,000
[5,000 x 1,400 + 2,500 x 700]
Fixed Cost [5,400,000 + 4,500,000] (9,900,000)
Net Loss (1,150,000)

Revised Profit / Loss:

Contribution 8,830,000
[5,000 x 1.2 x 1,180 (W-1) + 2,500 x 700]
Fixed Cost [5,400,000 + 4,500,000 + 300,000] (10,200,00)
Net Loss (1,370,000)
Incremental Loss (220,000)

OR:

Incremental contribution 80,000

[(5,000 x 1.2 x 1,180) - (5,000 x 1,400)]
Additional Advertisement cost (300,000)
Net Incremental Loss (200,000)

UL should not incur additional advertisement by reducing the sale price by 5% because it will
result into additional loss of Rs. 220,000.
 W-1): Revised Contribution per unit of X1:

X1
Sales Price [ 4,400 x 95%] 4,180
Variable cost (3,000)
Contribution per unit 1,180

A.7 Mars Limited:

a)
Quantity schedule Process A
Liters
Work in process – opening 800
Material added during the month 9,000
Abnormal gain (Bal.) 535
Total A 10,335

Joint product Comet 3,500

Joint product G-1 4,000
By - product String 1,000
Work in process – Closing B 950
Normal loss (800 + 9,000 – 950) X 0.1 885
Total 10,335

Products Units Sale Market Cost after Hypothetical Allocation

Produced price/unit value split-off market
value
Comet 3,500 1,500 5,250,000 420,000 4,830,000 6,174,742
(3500 x 120) 4,830,000
× 14,152,048
11,070,000
Gravity 4,000 2,200 8,800,000 5,600,000 6,240,000 7,977,306
6240,000
+
(4000 x 140)
11,070,000
× 14,152,048
2,000,000*
Total 11,700,000 14,152,048

b) Allocation of joint cost on the basis of net realizable value at split-off point:

*Conversion cost in process B

Cost per liter of comet and gravity

6,174,742+420,000
Comet = 3500
= 1,884.21

7,977,306+2,000,000+560,000
Gravity = 4000
= 2,634.32

c) Accounting Entries for losses and gain:

Dr. Cr.
Normal loss (885 x 200) 177,000
WIP-Process A 177,000
WIP-Process A 1,010,412
Abnormal gain 1,010,412
Cash (350 x 200) 70,000
Normal loss 70,000
 Abnormal gain (177,000-70,000) 107,000
Normal loss 107,000
Abnormal gain 903,412
Profit and loss 903,412
(1,010,412 - 107,000)
Workings:
(w-1)
Process - A
Liters Rupees Liters Rupees
b/d 800 1,500,000 Comet 3,500 *
Material 9,600,000 G-I 4,000 *
Conversion 4,500,000 By-Product (1,000 x 660) 1,000 600,000
Input 9,000 Normal loss 885 177,000
Abnormal Loss (Bal.) 535 1,010,412 [(800 + 9000 - 950) x 0.1 =
885 x 200]
c/d 950 1,681,364

10,335 10,335
*Balancing figure to be allocated that is 12,152,048

(w-2) Equivalents production unit (weighted average)

Material Conversion
Comet 3500 3500

Gravity 4000 4000

Abnormal Gain (at end) (535) (535)

Closing WIP 950 760 (80%)

7,915 7,725
(w-3)
Cost per Unit

9,000,000+9,600,000−600,000−177,000
Material = = 1,228.43
7,915

600,000+4,500,000
Conversion = = 660.19
7,725

Total 1,888.62

(w-4)

Cost Allocation

Abnormal loss (535 x 1888.62) = 1,010,412

Closing WIP (960 x 1228.43 + 760 x 660.62) = 1,681,364

 A.8 (a) Budgeted profit for the month of August 2022 - marginal costing

Rupees
Sales (4,000 x 700) 2,800,000
Variable cost of sales:
Opening stock of F.G -
Cost of goods manufactured:
Direct material (6,250 x 80%) = 5,000 1,200,000
x 240)
Direct labor ( 5,000 x 150) 750,000
Variable overhead (5,000 x 80 (w-4)) 400,000 2,350,000
Closing stock of F.G (470,000) (1,880,000)
1,000(5,000–4,000) × 470(W-2)

Net Contribution margin 920,000

Fixed cost (Given) (200,000)
Net profit 720,000

(b)

i. Sale volume variance:

(BQS – AQS) x Std. Contribution/unit
(4,000 – 5,200) x 230
276,000 F

ii. Material Variance

Price Usage
(SR – AR) x AQU (SQU – AQU) x S.R
[30 – 27(w-1) ] x 45144 [(5,400 x 8) – 45,144(w-2)]x 30
135,432 F 58,320 A

iii. Labor variance

Rate Efficiency
(SR – AR) x AHW (SHW – AHW) x S.R
(25 – 27.5) x 30,780(w-3) [(5,400 x 60) - 30780] x 25
76,950 A 40,500 F

iv. Fixed OH Expenditure variance:

Actual fixed OH (w-5) 186,000

Budgeted fixed OH 200,000
14,000 F
 v. Variable overhead

Expenditure Efficiency
(SR – AR) x AHW ( SHW – AHW) x S.R
[13.33 - (534,000/30,780)] (32,400 – 30,780) x 13.33
123,600 A 21,600 F

Workings:
(W-1) Actual Rate
S.R (240/8) 30
Less: Discount per kg (3)
(150,000/50,000)
Actual rate 27
(W-2) SQU

Budget Actual

100 94 100 90
8 6% 7.52 8.36 10% 7.52

5,400 x 8.36 = 45,144

(W-3) AHW for A.P

5,400 x 6 x 0.95 = 30,780

(W-4)
Overheads Rates Per unit Per hour
Factory overhead 120/unit 20/hr. (120/6)
Fixed overhead 40/unit 6.67/hr. (40/6)
Variable overhead 80/unit 13.33/hr. (80/6)

(W-5) Under/Over applied Factory OH

Applied factory overhead (5400 x 40) 216,000
Actual fixed overhead (Bal.) 186,000
Over Applied Overhead 30,000

(W-6) Total Overheads

Actual factory overhead 720,000

Actual fixed overhead 186,000
Actual variable overhead (Bal.) 534,000
A.9

(a) Jupiter Limited

Identification of limitation factor:

Hours
Existing capacity utilization [(3,500 × 8) + (6,000 × 5) + (7,000 × 6)] 100,000
Full capacity (100,000/0.8) 125,000
Available capacity 25,000
Machine hours required for exportorder (1,200 × 8) + (1,500 × 5) + 27,900
(1,800 × 6)
Shortfall 2,900

EXPORT ORDER L1 L2 L3
Relevant manufacturing cost/unit ---------------- Rupees ----------------
Direct material - increased by 10% 990 660 1,100
Direct labour 800 750 1,400
Variable overheads - increased by 15% 690 805 690
Fixed overheads Irrelevant cost
Export house services Irrelevant cost
Total variable cost 2,480 2,215 3,190

Outsourcing cost/unit:
Direct material 990 660 1,100
Cost charged by AL 1,800 1,600 2,500
Total variable cost 2,790 2,260 3,600

Saving by producing per unit

310 45 410
Machine hours per unit 8 5 6
Saving by producing per hrs
39 9 68
In-house production ranking 2 3 1

Optimum Production plan: ------------------ Units ------------------

For local supply 3,500 6,000 7,000

For exports – in-house production 1,200 (W-1) 920 1,800

Outsourcing:
For exports (1500 – 920) - 580 -
Total units 4,700 7,500 8,800

W-1:
Available hours for export 25,000
Hours for production of:
- L3 (1800×6) (10,800)
- L1 (1200×8) (9,600)
Remaining hours 4,600

Production of L2 (4,600/5) 920

(b) Non-financial considerations that will often be relevant to an outsourcing decisioninclude
the following:
Risks of outsourcing work:
• Supplier may produce items of a lower standard of quality.
• The supplier may fail to meet delivery dates and the buyer may be dependent on the
supplier to commit onward delivery to its buyer. In case of buying of a component,
production process of the end-product may be held up by a lack of component.

Benefits of outsourcing work:

• Outsourcing work will enable the management to focus all of its efforts on those aspects of
operation the entity does best (e.g., we have no expertise of manufacturing tyres as a car
manufacturer).
• The external supplier may have specialist expertise which enables it to provide outsourced
products more efficiently and at a cheaper price.