Case study 3:
In-house activity compared with bought-in services:
FIONA a management accountant describes a situation where a company was considering buying in services rather than employing its own staff. Cost-volume-profit analysis implies that the decision should be based on the costs saved by not undertaking the activity in-house (the variable costs and any fixed costs that are avoidable) together with the costs incurred in buying the product or service from an external supplier (price multiplied by quantity purchased).
FIONA: A company had been employing its own legal department, comprising a qualified solicitor and two assistants. The solicitor was about to retire and the company had to decide whether to advertise for a replacement or to use a commercial law service as and when required. There would be no redundancy costs in respect of the two assistants because the younger one could be redeployed to a vacancy elsewhere in the organization and the other would continue to be required as the internal contact with the commercial law service.
I showed the management that, because the commercial law service would charge on an hourly basis, the costs to be compared were the variable costs per hour charged by the commercial service and the fixed costs per annum of the in-house solicitor's salary. We compared the hourly charge rate of £400 with the solicitor's salary of £60,000 and the assistant's salary of £36,000 and worked out that the break-even point would be 240 hours of the commercial law service each year. If more than 240 hours are requested next year, it would be worth continuing the in-house service.Report Requirements:
1. Terms of References:
• Objective of the report
• Who asked for it and why?
• Who did the work?
• Any limitations imposed
• Basis of information
2. Introduction:
• Setting the Scene of the case study (Should reference to the case study)
• Identifying Problem of the case study, and how it is arisen? and why?
3. Body or Discussion:
• Decision you have taken; what tools was used?
• What was your understanding or learning?
• You are the expert and you need to interpret the results for others.
• What were your findings and what other alternatives did you consider?
• Investigate key issues or options that are relevant (logical sequence)
4. Conclusion:
• Solution and summarise the findings.
• How you feel? (in general terms, about the situation.)
5. Recommendation:
• Action (or non-action) recommended as a result of the conclusions reached in case of a problem
• Must be developed and justified using available information; stating the need for more information, and further investigation will not be sufficient
6. Appendences:
• If possible, put all major details into appendices. This includes calculation or workings.
• Ensure cross references to the text in the report