Essay Example on Agnew Agricultural Limited: Outsourcing Mowers to Save Money

Question 1

The option that Agnew Agricultural Limited should consider regarding the manufacture of the new mower is outsourcing. Having an external manufacturer to do all the work would be one of the most effective strategies since it would significantly save money (Christensen, Skaerbaek, & Tryggestad, 2019). As indicated in the in-house and outsourced manufacture table, the selling price of each mower will remain the same, but it will be more costly for the firm to produce the equipment itself. The extra costs will come from the purchase of raw materials, overhead, and labor costs. Contracting another firm to produce the mower would be much cheaper since Agnew Agricultural Limited will only focus on selling the equipment to farmers. The organization will also benefit in other sectors since it will focus more on its core competencies and the other areas that need to be improved.

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Question 2

In both costing methods, the distribution of overhead items to their cost centers is on a reasonable basis. The reasons for the apportionment in both the old and proposed costing methods is to separate the profits, expenses, losses, and sales. The different elements will then be assigned to different accounts and departments to increase the effectiveness of the process. Since the taxable profits are reported to the government, the apportionment is of significant importance. All items have been collected in a good manner in their suitable account subheadings. Examples of the categories in both tables are expenses by employees, maintenance costs, and the number of hours they are used, the absorption rate, machine, power, labor, and materials, among other items. The most significant reason for the apportionment is to allocate the items to cost centers, a process known as departmentation. Re-apportionment has also been performed in both costing methods so that the various departments can run smoothly and effectively. The sub-division is necessary since each department is allocated a specific activity of the concerns like maintenance and expenses incurred by the workers in the firm.

However, several factors must be considered during apportionment. There must be a division of responsibility in the various departments the organization should be clear and should not have any ambiguity the location of the various departments and the sequence of operations must be considered with the aim of having a smooth flow of production.

Question 3

In this case, overhead chargeable refer to the expenses the organization will incur while operating its business when dealing with the Large Machinery Profit Center. The sales director is correct since he suggests that the new proposed costing method is effective and superior to the previous one since it reduces overhead chargeable to the firm in question, which is already struggling to make sales and gain profits (Hilorme, Perevozova, Shpak, Mokhnenko, & Korovchuk, 2019). The proposed costing strategy should be considered since it will enable the company to carry out its profit-making activities effectively and with more significant intensity.

One of the benefits of reduced chargeable is that the company will have an opportunity to earn refunds where possible. There will be better payment plans and any additional fees that the firm would incur from the previous costing. The reduction of supplies catered for by the proposed costing. The business could also get a refund on various items based on the payment plan used. The second benefit is that there will be the absorption of the costing advantages (Hilorme et al., 2019). The company will effectively price its products for profit after applying all the bills. The third advantage is that there will be tax advantages for the firm. The proposed costing system will enable the business to reduce its taxable income, and the advantage is that the overhead costs are deductible only in the years they incurred.

Question 4

The first advantage of the payback period method is that there is a preference for liquidity. The method gives vital information other capital investment methods do not. The business is thus more likely to recover its costs and venture into other activities. The method is easy to understand and calculate as compared to other methods. All that is required is the yearly cash flows and the initial cost of the project. One of the disadvantages of the payback period is that not all cash flows are covered since considerations are only made until the time when the initial investment is recovered. The other disadvantage is that profitability is ignored due to the simplicity of the method (De Albornoz, Galera, & Millan, 2018). It is crucial to understand that most significant projects have irregular cash flows and need more investments too.

The second method is the net present value, where the outflow and discounted future cash inflow are added. One of the advantages of the net present value method is that it acknowledges that the future dollar is worth more than that of the current one (De Albornoz et al., 2018). The method is also useful in determining whether there is value being created for the company or n investor and by what amount. Finally, the method considers the risk inherent and the cost of capital. One of the disadvantages of the method is that the cost of capital in a company is not accurate, and the value is mostly guessed.

Question 5

Regarding the risk and return presented by the Weldmaster and Solderking options, the latter would be the best choice. Currently, the firm lacks investment capital, and assistance is needed to modify the new equipment. Although Solderking's payback period is longer than that of Weldmaster, other critical factors must be considered. For example, the accounting rate of return for Solderking is higher than that of Weldmaster, meaning that the return investment will be more but will take a longer time. The accounting rate of return is essential in capital budgeting and is used to calculate the amounts of profit generated from the net income of a particular capital investment (De Albornoz, Galera, & Millan, 2018). Solderking also has a higher cash flow in the five consecutive years indicated on the chart.

When comparing the profits generated from the two options, it is clear that the Weldmaster's returns constantly decrease during the five consecutive years indicated on the chart. However, Solderking has maintained a constant income flow, and the net profit increases during the five consecutive years. The data indicated in the chart is enough proof that Solderking would be the best choice for the modification of the new equipment. The other factor that should be considered before any decision is made is the internal rate of return. In accounting, the internal rate of return refers to the number of earnings on a particular investment (De Albornoz et al., 2018). Although Weldmaster has a higher internal rate of return, it does not mean the returns will be higher than those of Solderking.

Reference List

Christensen, M., Skaerbaek, P. and Tryggestad, K., 2019. Contested organizational change and accounting in trials of incompatibility. Management Accounting Research.

De Albornoz, V., Galera, A. and Millan, J., 2018. Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?. Sustainability, 10(12), p.4371.

Hilorme, T., Perevozova, I., Shpak, L., Mokhnenko, A. and Korovchuk, Y., 2019. Human capital cost accounting in the company management system. Academy of Accounting and Financial Studies Journal, 23, pp.1-6.