USA Make or Buy and Covering Fixed Costs

[JPCostAccountant]

Hello,

I have been tasked with developing a form which shows the breakdown between fixed, variable, and material costs for a given item that can be either produced or purchased.

The problem I am running into is that these items will be the output of a process that was never intended to result in a finished good. This manufacturing process produces only mfg inputs for other manufacturing processes. I know from other metrics (efficiency and revenue per labor dollar) that this low level process, and the investments that have been made in it to increase capacity, have helped the business, but I am having a hard time developing a departmental rate breakdown for a department that was never meant to stand on its own.

My work so far when doing a make or buy analysis almost always shows a higher cost for the output items of this process versus the same item purchased from a vendor, and I have found it difficult to describe analytically the benefits of keeping this production in house. Intuitively, I know the benefits of spreading fixed costs over a greater number of production outputs, but how do I describe this on an item by item comparison basis?

Any thoughts on a starting point for a new way of doing this?

 

[SSM0011]

You have to come at something like this from a different viewpoint. This is not finished goods, it’s a component. That viewpoint is this: “What costs would be AVOIDED if the part was made by a vendor? That will help you determine what the real cost of that part actually is. It actually helps to process map the making of this part starting at the point of acquiring the inventory to make it and ending at the point as if it was delivered by the vendor and stored to be used on the finished good. At each point along the process you must ask yourself what additional real costs are being incurred. Consider this. Say you need to use some more space on the plant floor to make it...but you have unused space on the plant floor already, and thus, even if you didn’t make that part using that available space, you would still have to pay the rent for that space. Therefore, for this part, there’s no additional cost for plant space so you DO NOT include a cost component for plant space in the cost to make...right now. That could change. If two years from now you start running out of plant space to make and store the finished product, you might have to go back to this parts make-vs-buy analysis and add rental space costs because at this future time it may be too cost prohibitive to add space to the plant and now every square foot has to count.

 

[JPCostAccountant]

Thanks, I am actually working on a process map for this right now.