Chapter 18: Make, Buy, or Reprice

Accounting Analytics: An Integrated Approach

In this chapter

Part V of V: Capstone Cases

Chapter 2 of 3 in this Part

• 18.1 The Situation
• 18.2 The Data You Will Use
• 18.3 Getting Started
• 18.4.1 Phase 1: What the Records Show

• 18.4.2 Phase 2: What a Product Costs
• 18.4.3 Phase 3: Make, Buy, or Reprice
• 18.4.4 Phase 4: Standards and the Memo
• 18.5 Deliverables and Checklist
• 18.7 Looking Ahead

This is a case, not a chapter of tutorials. The deck opens with a kickoff (the situation, what you hand in, how it is judged, the data and the setup) and then follows the four phases of the requirements, each ending with a milestone check-in. Present the kickoff first, and each phase when its milestone begins.

Learning objectives

1. Classify a plant’s conversion costs from the ledger and the production records into costs that vary with output, committed capacity costs, and the cost of capacity left unused, and test each classification against the data.
2. Compute standard, actual absorption, and time-driven costs for product families, and explain why the three disagree and which question each answers.
3. Evaluate a supplier’s quote on relevant costs, separating the costs that stop from those that stay, and value the capacity that buying would free.

The first three objectives cover classifying the plant’s conversion costs and testing each classification, the three costing views and the question each answers, and the make-or-buy test on relevant costs.

Learning objectives (continued)

4. Analyze a price increase with contribution margins and the volume it can afford to lose, and judge the evidence on how customers respond to price.
5. Propose standard costs on a stated level of capacity, measure their effect on inventory and on statements already issued, and recommend how to report it.
6. Choose SQL, Excel, or Power BI for each step of an integrated analysis, and write a recommendation, family by family, that two decision makers who disagree can act on.

The last three cover pricing against the volume an increase can lose, standards on a stated capacity and their effect on the statements, and choosing the tools for a recommendation that two people who disagree can act on.

Is the company selling below cost?

• The CFO: made furniture earns far less than its standard margin
• The production manager: idle capacity is not the products’ fault
• A contract manufacturer has quoted six of the families the plant makes
• You, the staff accountant, write the analysis and a decision memo

Once the manufacturing variance is charged, the furniture Charles River makes earns about ten points less than its standard margin, while the furniture it buys earns about what its standards say. The plant applies overhead at little more than a third of what it costs, and neither prices nor standards have changed in three years. The quote expires soon, the next price list must go to customers, and the two decision makers meet to decide. The case has no tutorials: each requirement says what the decision needs and which chapters it draws on, and you decide how to produce it.

What you will hand in

1. MakeBuy.sql, with its header complete and two comment lines above every query.
2. Make Buy Reprice.xlsx, with the Assumptions sheet holding the quote and every assumption in Table 18.2; sheets for cost behavior, costs, make or buy, capacity, prices, and standards; and the Documentation sheet with the date through which the data run.
3. Product Costs.pbix, with its About and Validation pages and its Tests tab.
4. The memorandum, of no more than two pages, with its decision table and an appendix of exhibits of no more than three pages.

These are the four deliverables, as the chapter’s checklist lists them. The workbook is the center of the analysis; the script feeds it, the explorer lets the decision makers move through it, and the memo turns it into decisions.

How your work will be judged

• Every figure reconciled to account 5080 and to the inputs to 1090, with the populations and units stated.
• Cost behavior tested before any cost is called variable or committed, with the records that cannot carry the test named.
• A different cost for each question: the absorption proxy for neither decision of this case, relevant costs for make or buy, time-driven costs for the pricing floor and the capacity question, and standards on normal capacity for inventory (Noreen, 1991; Balakrishnan et al., 2012a).

A strong submission is one a reviewer can rerun and trace, and one that uses a different cost for each question. Read these criteria now and again before each milestone.

How your work will be judged (continued)

• The crew assumption made explicit, with the break-even quotes and the one-time costs.
• Price increases set beside the volume they can afford to lose and the evidence on how customers respond.
• Standards proposed on a stated capacity, with their effect on the fiscal 2026 statements measured, the evidence that would show whether those statements need correcting named, and both reported to the CFO.
• Files that someone else could rerun, and a memo that two people who disagree can act on.

The memo is judged on whether two people who disagree can act on it: each recommendation states what it depends on, and the crew decision stays with the production manager.

18.1 The Situation

Five questions from two decision makers

• What does each family cost, and which costs would stop?
• Where the supplier is cheaper, should Charles River buy?
• Where it keeps making, what prices does the next list need?
• What happens to the plant’s hours, its crew and the costs that stay?
• Should the standards change, and to what?

The CFO asks the first three questions, and the production manager adds the last two. Each requirement answers part of one of them, and the memo answers all five.

The controller’s five conditions

• Everyone works from the same assumptions, listed in one table
• Every figure reconciles to the variance and clearing accounts
• The latest fiscal year is the base, because the records end there
• The decision is made family by family
• Decisions about positions belong to the production manager

The costs that flow into the clearing account are the payroll, the Factory Overhead entries and the depreciation charged to it, not the debits that favorable closes post back to it. The base year is the last year of the records, even though the decisions take effect two years later. The products Charles River buys in the same families are different products, not substitutes for the ones it makes. The memo states what a change in the crew would save and what it would cost, and leaves the decision there.

A quote for six families

Table 18.1 · The contract manufacturer’s quote (a hypothetical exhibit)

Family	Quoted annual volume (units)	Average price per unit	One-time tooling and qualification	Lead time
FUR-BNH Benches	1,450	$325	$18,000	8 weeks
FUR-NGT Nightstands	3,200	$270	$22,000	8 weeks
FUR-SDB Sideboards	3,800	$325	$25,000	8 weeks
FUR-TBL Dining tables	5,000	$315	$30,000	8 weeks
LGT-SCN Wall sconces	4,600	$180	$15,000	6 weeks
TXT-PIL Pillow covers	700	$220	$8,000	6 weeks

The quote is the case’s assumption, a hypothetical exhibit, not part of the dataset. Its prices are averages per unit at the base year’s mix of items in each family, set to resemble what Charles River pays for the products it already buys in those families.

The quote comes with terms

• Prices are fixed for two years
• Charles River commits to buy a minimum share of each family chosen
• It pays inbound freight, because the goods are sold at the supplier’s plant
• The supplier builds to the company’s designs and credits defects
• Quality assurance inspects samples on arrival

The purchasing manager estimates the freight as a small share of the price, and the minimum commitment applies each year. Payment is due on the supplier’s terms. Requirement 6 asks you to list the terms that the numbers leave out.

The plan everyone works from

Table 18.2 · The controller’s planning assumptions

Assumption	Value
Base year	Fiscal 2026
Practical capacity	80% of the available hours in WorkCenterCalendar
Straight-time labor rate and burden	26.62 an hour; burden 14.14% of pay
Hours per standard hour at plan	1.18, of which 0.18 indirect
Plan volume, taken as normal capacity	68,912.79 standard hours a year
Salaried production staff at plan	263,191.24 a year, before burden
Depreciation at plan	293,499.96 a year

Every figure in the case rests on these assumptions, so they go on the Assumptions sheet, one to a cell, and every formula refers to them. The plan figures are the plant’s plan for the next year, which the Part III case built if you completed it.

Assumptions for the crew, prices and statements

Table 18.2 · The controller’s planning assumptions

Assumption	Value
Practical hours of one position	80% × 8 hours × the 2026 working days
Severance per position	Eight 40-hour weeks of straight-time pay with burden
Materiality screen for the statements	5% of income before income taxes as recorded
Margin floor for pricing	40% gross margin on time-driven cost, before unused capacity
Demand-growth test (optional)	Volume 40% and 50% above 2026

The materiality rate is a first, quantitative screen, not the whole judgment, and the margin floor is the controller’s policy; use both as written. The demand-growth test is optional, for the Solver part of Requirement 7.

18.2 The Data You Will Use

What carries over from the chapters

• Chapters 10 and 11 measured the plant’s hours against standard
• Chapter 7’s regression, Goal Seek, Data Tables and Solver
• Chapter 15’s disconnected table that switches a measure
• Exercise 8.6’s price-list tests, and Chapter 7’s promotion lift

Much of what you need you have already built. The scripts of Chapters 10 and 11 measured the plant’s hours against standard, and the plan figures are the plant’s plan for the next year. The Part III case file helps if you have it, but every method the case needs is stated in its requirements.

Tables the chapters used little or not at all

• Item: the standard cost, its parts, and SupplyMode
• Routing and RoutingOperation: setup and run hours by work center
• WorkCenter and WorkCenterCalendar: the hours each center had
• ProductionCompletionLine: the standard cost each completion released
• PayrollRegisterLine, Employee.PayClass, and the price-list tables

Material is standard cost less conversion cost. PayrollRegisterLine tells regular, overtime and salary earnings apart, and Employee.PayClass tells hourly from salaried staff. PriceList and PriceListLine hold the price lists, and PurchaseOrderLine what Charles River pays for the products it buys. Profile each table before relying on it, as Chapter 10 profiled WorkOrder.

Three files, three tools

Table 18.3 · Tools and files

Tool	File	Holds	Hand-off
SQL	MakeBuy.sql, run on CharlesRiver_Capstone.sqlite	Family results, the inputs to 1090, activities, capacity	Copy with Headers or Export to CSV, unrounded
Excel	Make Buy Reprice.xlsx	Assumptions, cost behavior, costs, make or buy, capacity, prices, standards, documentation	A Table of item costs, one row per item
Power BI	Product Costs.pbix	The explorer for the meeting, with a Validation page and a Tests tab	Reads the workbook and CharlesRiver.xlsx

Each tool hands its results to the next in the ways the book has taught: Copy with Headers or Export to CSV from DB Browser, unrounded, so that the workbook’s checks hold, and Power Query in both Excel and Power BI. The workbook’s Table of item costs is what the explorer loads.

Watch out: units and populations need care

• Group families by the first seven characters of the item code
• Quantities are fractional: add them, never count rows as units
• State which units you divide by, because closes include earlier work
• Leave out design services, which carry no standard cost
• Opening stock has no item detail: rebuild it from what was made since

The three-letter product type of Chapter 5 is not enough, because the same type can name a dining table in Furniture and a table lamp in Lighting. The variance closed in the base year includes work completed the year before, and some work orders are still open. Stock by item can be rebuilt only from what was made and shipped since the ledger opened, and only on an assumption about which units were shipped.

Watch out: some records cannot carry the analysis

• Measure use with the routings’ standard times, not the time recorded
• A family’s share of the overhead variance is an allocation
• Some months carry three payrolls, because payroll posts on pay dates
• The start-up month distorts any monthly trend it enters

Part III found that direct time recorded by work center moved toward packing and quality assurance and was often recorded after the operation had ended. The overhead variance each work order’s close records moves with that work order’s actual direct labor cost, so it does not measure what the family consumed. Chapter 11 found the months with three pay dates.

18.3 Getting Started

Set up before you begin

• Work in a capstone copy of the database; the download never changes
• Head MakeBuy.sql, and put two comment lines above every query
• Give the workbook an Assumptions sheet and a Documentation sheet
• Create Product Costs.pbix in Power BI Desktop, which needs Windows

The working copy is CharlesRiver_Capstone.sqlite, so that the Part III working copy keeps its views. The script’s header states its purpose, the database file, the preparer and the date, and its checks; the two comment lines say what a query tests and its population and expected result. The Assumptions sheet holds the quote and the controller’s assumptions, and the Documentation sheet states the purpose, the sources and the date through which the data run. Excel needs the Solver add-in only for the optional part of Requirement 7. On a Mac, plan a Windows computer for Requirement 5.

Four milestones, one for each phase

1. What the records show (Requirements 1 to 3): the family results, the inputs to 1090 with their behavior tests, and the capacity table.
2. What a product costs (Requirements 4 and 5): the three costs for each family, the unused capacity reconciled to 1090, and the explorer.
3. Make, buy, or reprice (Requirements 6 to 8): the decision for each quoted family, the value of freed capacity, and the price increases.
4. Standards and the memo (Requirements 9 and 10): the revised standard, its effect on the statements, and the memo.

Work through the phases in order, because each uses what the one before found. Your instructor may ask you to hand in each milestone and may then release checkpoint values, so that an early error does not carry through the rest of the case.

Choose the tool for each step

• A query extracts exactly the rows, and reconciles them to the ledger
• A workbook holds the assumptions, with every cost a formula
• A report lets the decision makers move between views as they talk
• Where the choice is not clear, choose, and document why

Each requirement’s opening paragraph says why a tool fits where the choice is clear. Part of the task is to explain the choices that are not.

Check your understanding

Which tool fits each step?

1. Family margins from joins that can fan out
2. Testing which inputs move with output
3. Moving between families and views in the meeting
4. Item costs the decision makers will want to change

Ask students to justify each choice, as the case’s documentation must.

Each step has its tool

1. A SQL query, written once and reconciled to the ledger
2. SQL extracts by month; the regressions go in the workbook
3. A Power BI explorer with a measure that switches views
4. Workbook formulas over one Assumptions sheet

These are the reasons the requirements themselves give. A query repeats exactly, a workbook shows its reasoning and lets the assumptions change, and a report lets a reader explore.

18.4.1 Phase 1: What the Records Show

Phase 1 at a glance

• Requirement 1: Test the CFO’s numbers and the premises behind them (Chapters 9 to 11)
• Requirement 2: Take the overhead apart (Chapters 7, 10, and 11)
• Requirement 3: Measure the activities and the capacity (Chapters 10 and 11)

Milestone 1: What the records show (Requirements 1 to 3): the family results, the inputs to 1090 with their behavior tests, and the capacity table.

Phase 1 establishes what the records say before anything is costed: whether the CFO’s numbers hold, how the overhead behaves, and what each family uses of the plant.

Test the CFO’s numbers and premises

Requirement 1 · Test the CFO’s numbers and the premises behind them (Chapters 9 to 11)

• Produce: family results, and three margins for each made family
• Tool: one query in MakeBuy.sql, reconciled before reading a margin
• Revisit: Chapter 9’s variance, Chapter 10’s fan-out, Chapter 11’s CASE
• Check: the families’ variances add up to the variance account

For each manufactured family in the base year, return the units sold, revenue, list value and standard cost; the variance of the year’s closes, by material, labor and overhead, and as a share of the standard cost completed; and the variance per unit completed. Compute the margin at standard, after the variance per unit completed, and with the year’s whole variance charged, as the ledger charges it, and set the purchased products of the same family beside them. Then test the CFO’s second premise: whether the records show any change in list prices or standard costs in the three years, and what evidence would show that nothing changed.

Take the overhead apart

Requirement 2 · Take the overhead apart (Chapters 7, 10, and 11)

• Produce: the inputs to the clearing account, per standard hour
• Tool: SQL extracts the inputs by month; regressions in the workbook
• Revisit: Chapter 7’s regression, Chapters 10–11 on the clearing account
• Check: each input is classified in a sentence, with its evidence

Split the base year’s inputs into direct and indirect labor, regular and overtime, salaries, employer taxes and benefits, the Factory Overhead entries and depreciation, and set them against the standard cost that completions released, by labor and overhead. Extract each input by month, the parts of payroll as well as its total, with the standard hours completed, test which inputs move with output after the start-up month, and explain what including that month and the months with three pay dates would do to the test. Classify each input as a cost that varies with output, a committed capacity cost, or neither.

What each family uses of the plant

Requirement 3 · Measure the activities and the capacity (Chapters 10 and 11)

• Produce: each family’s work, and each work center’s capacity
• Tool: SQL: joins and sums over the year’s work orders and calendar
• Revisit: Chapter 10’s joins and aggregates, Chapter 11’s work centers
• Check: a sentence on why routing time measures use, and its limits

For each family’s completions, return the work orders, units, average batch size, run and setup hours by work center, and material issue lines, with setup hours and issue lines per thousand units. For each work center, return the hours available, the practical capacity under the controller’s assumptions, the routing time used, and its share of each. The Watch out on records says why recorded time will not do; say also what routing time leaves out.

Milestone 1: before you hand it in

• The family results reconcile to the manufacturing variance account
• Each input to the clearing account is classified, with its test
• The months that distort the tests are named and handled
• Each work center’s routing time is set against its capacity

These are self-checks, not answers. If the families’ variances do not add up to the ledger, look first for a join that fans out.

18.4.2 Phase 2: What a Product Costs

Phase 2 at a glance

• Requirement 4: Compute three costs for each family (Chapter 7)
• Requirement 5: Build the explorer for the meeting (Chapters 13 to 15)

Milestone 2: What a product costs (Requirements 4 and 5): the three costs for each family, the unused capacity reconciled to 1090, and the explorer.

Phase 2 builds the costs the decisions use. The workbook’s item costs feed the explorer now and the decisions of Phase 3.

Three costing views charge products differently

Figure 18.1 · Three ways to cost the plant’s time (detail)

Standard costing charges each product a rate per standard hour. Actual absorption, in concept, charges all of the year’s cost divided by the units made, and the case can only approximate it. Time-driven costing charges each product for the capacity it uses at the cost of practical capacity, plus the factory overhead. Kaplan and Anderson suggest, as a rule of thumb, that practical capacity is about four-fifths of theoretical capacity, or a little more. All three are views for managers; what inventory may carry is the question of Requirement 9.

What each view leaves out of product cost

Figure 18.1 · Three ways to cost the plant’s time (detail)

Read the columns in the same order. Standard costing sends everything else to the variance, which Charles River charges to cost of goods sold; actual absorption, in concept, leaves nothing out, so idle time is spread into every unit and unit cost rises whenever volume falls; time-driven costing reports unused capacity as a cost of the plant. Cooper and Kaplan argued that the resources supplied but not used should appear as that cost, visible to the managers who can act on it.

Compute three costs for each family

Requirement 4 · Compute three costs for each family (Chapter 7)

• Produce: each item’s cost under three views, and the unused capacity
• Tool: the workbook: every cost a formula, every assumption a cell
• Revisit: Chapter 7’s Data Tables, and Chapter 9’s standard costs
• Check: item costs and unused capacity reconcile to the inputs

Standard is the item’s standard cost; actual absorption, as the case approximates it, adds its family’s variance per unit completed. Time-driven costs material, with the base year’s material variance as a rate, the Factory Overhead entries per standard hour, and the committed costs of the crew, supervision and equipment per hour of practical capacity, times the item’s routing time per unit, with setup spread over the family’s average batch. Reconcile the item costs, applied to the year’s completions, plus the unused capacity to the inputs to 1090, with the setup that the family-average batch leaves out as a line of its own. Summarize by family at the base year’s mix, with the margin under each view and the share of margin the top fifth of the finished goods sold earns. A Data Table varies practical capacity, which divides the same committed cost between the products and the unused capacity, and Excel takes its input cell only from the table’s own worksheet. Keep the item costs as an Excel Table, so that Power BI can load them.

Build the explorer for the meeting

Requirement 5 · Build the explorer for the meeting (Chapters 13 to 15)

• Produce: Product Costs.pbix, with Families and Capacity pages
• Tool: Power BI: the decision makers move between views as they talk
• Revisit: Tutorial 15.1’s switching measure, Chapter 13’s blanks
• Check: a Tests tab ties each view’s totals to the workbook

Load the item cost Table from the workbook and the invoice lines and invoices from CharlesRiver.xlsx, add a year column, and relate the lines to the item costs. Design services have no row in the cost table, so decide how the report treats that blank. Enter a Costing View table with Enter data, and write a Product Cost measure that switches on the view selected, with Margin and Margin % beside it. Add an About page and a Validation page that reproduces control totals from earlier chapters.

Check your understanding

Which cost fits each question?

1. Make or buy a quoted family
2. The price on the next list
3. Finished goods in inventory
4. The year’s whole cost over the units made: which decision?

Ask students why one cost cannot answer all four: each answers a different question, as Noreen, and Balakrishnan and colleagues, argue.

Each question has its cost

1. Relevant cost: the costs that stop if the family is bought
2. Time-driven cost, on practical capacity
3. A standard on normal capacity
4. Neither decision of this case: it spreads idle capacity into every unit

The chapter’s criteria pair the costs and questions the same way. Computing each cost, and showing where the views disagree, is the work of Requirements 4 and 6.

Milestone 2: before you hand it in

• Every item has three costs, each a formula over the Assumptions sheet
• Item costs and unused capacity reconcile to the clearing account
• The Data Table shows how practical capacity splits the same cost
• The explorer’s Tests tab agrees with the workbook, view by view

These are self-checks, not answers. A cost that cannot be traced from the explorer back to the Assumptions sheet is not finished.

18.4.3 Phase 3: Make, Buy, or Reprice

Phase 3 at a glance

• Requirement 6: Decide make or buy, family by family (Chapter 7)
• Requirement 7: Value the capacity that buying would free (Chapter 7)
• Requirement 8: Reprice the families below the floor (Chapter 7)

Milestone 3: Make, buy, or reprice (Requirements 6 to 8): the decision for each quoted family, the value of freed capacity, and the price increases.

Phase 3 makes the decisions: make or buy for each quoted family, the value of the capacity buying would free, and the prices of the families still made.

Compare the quote with the costs that stop (1 of 3)

Figure 18.2 · The make-or-buy test for one family (detail)

Start from the delivered quote, the price plus inbound freight. If it is below materials and the factory overhead that varies, the cost that stops even if the crew stays, buy, provided the terms, quality and minimum volume are acceptable and two years of savings cover the tooling. If not, ask whether it is below that cost plus the crew time the family uses.

The crew decides the middle case (2 of 3)

Figure 18.2 · The make-or-buy test for one family (detail)

If the quote is below that cost plus the crew time, buy only if the crew will be reduced in step with the hours freed and two years of savings cover tooling and severance. If the quote is above both costs, the flowchart goes straight to keeping the family and testing its price.

Otherwise keep making, and test the price (3 of 3)

Figure 18.2 · The make-or-buy test for one family (detail)

If the crew stays, buying adds the supplier’s price to costs the company keeps paying, so keep making, unless the freed hours have another use, as growth would give them. The test assumes no quantified benefit from another use of those hours, so a supported alternative use is weighed separately, with the supplier’s terms and the cost of the transition. Every family kept is tested against the margin floor, and a family below it is repriced, weighing the volume the increase could cost.

Decide make or buy, family by family

Requirement 6 · Decide make or buy, family by family (Chapter 7)

• Produce: each family’s relevant cost, with the crew kept and reduced
• Tool: the workbook: change the quote and the crew, watch the answer
• Revisit: Chapter 7’s Goal Seek and two-way Data Tables
• Check: your answer stands beside the absorption view, explained

With the crew kept, the relevant cost is materials and the overhead that varies; with the crew reduced in step with the hours freed, add the crew’s cost of the routing time. Compare each with the delivered quote, and compute the annual effect at the base year’s volume. Add tooling and severance for the families you would buy, over the two years the prices are fixed, before taxes and without discounting. Use Goal Seek for each family’s break-even quote under each crew case, and a two-way Data Table of the quote against the share of freed crew time removed. Then list the terms that the numbers leave out.

Watch out: absorption cost is not a relevant cost

• It includes supervision, depreciation and the crew’s idle hours
• Those costs do not stop when one family is bought
• They fall on the families that remain, which then look dearer
• Compare the quote with the costs that would stop

The remaining families’ higher costs invite the next decision to buy: the spiral that cost systems built on actual volume can set off. For each cost you count as stopping, state what has to happen for it to stop.

Value the capacity that buying would free

Requirement 7 · Value the capacity that buying would free (Chapter 7)

• Produce: hours freed by work center, and the plant’s use afterwards
• Tool: the workbook; Solver for the optional growth test
• Revisit: Chapter 7’s Solver and shadow prices, and Exercise 7.4
• Check: the freed hours are set against capacity already unused

Measure the freed hours on the year’s completions, the base of the capacity table, and compare them with the capacity the plant already leaves unused, in hours and in positions on the same base, and say what that comparison means for the decision. Hours spare over a year may not be spare in every week, work center or skill, so a crew plan needs more than the annual total. Show what happens to the cost of the remaining families if the crew is kept. The optional part asks Solver which families to buy if volume grew, minimizing the added cost with the crew kept and each work center’s practical capacity as the limit, and which work center binds, at what shadow price. That model leaves out the quote’s minimum volume and tooling, and it plans a year, not a production schedule, so its answer is a benchmark: check each family it buys against the minimum, and cost a plan the supplier would accept.

Reprice the families below the floor

Requirement 8 · Reprice the families below the floor (Chapter 7)

• Produce: floor prices, the increases, and the volume each can lose
• Tool: Goal Seek in the workbook; choose a tool for the price evidence
• Revisit: Chapter 7’s promotion lift, and Exercise 8.6’s price lists
• Check: each increase is set beside the volume it can afford to lose

Measure contribution over the relevant cost with the crew kept, and compute the share of volume each increase could lose before the family earns less contribution than it does now. Test whether order volume, measured as a list-price-weighted order-value proxy for volume, rose in the months of past promotions, a screen that cannot measure how customers would answer an increase, and check the dates and use of the price lists. Recommend increases and how the lists should be rebuilt, and show how the answer changes for any family you would buy. Marn and Rosiello showed price to be the most powerful lever on profit: on average economics, a small price gain with no loss of volume would raise operating profit several times as much as the same gain in volume. Chapter 15’s gross-to-net waterfall traced Charles River’s price from list value to recorded net revenue, which is not yet the pocket price.

Check your understanding

What stops if a family is bought?

1. The materials the family uses
2. The factory overhead that varies with output
3. The crew’s time on the family’s routings
4. Supervision and the plant’s depreciation

Ask students what would have to happen for each cost to stop.

Each cost has its answer

1. It stops at once, on the case’s avoidability assumption
2. It stops at once, on the same assumption
3. It stops only if the crew is reduced in step with the hours freed
4. It stays, and falls on the families that remain

This is the test of the flowchart. The first two answers rest on the case’s avoidability assumption, that purchases and the overhead that varies follow the family’s volume. Which families pass it, under each crew case, is the work of Requirement 6.

Milestone 3: before you hand it in

• Each quoted family has a decision under both crew cases
• The one-time costs and the break-even quotes are shown
• The freed hours are compared with the capacity already unused
• Each increase is set beside the evidence on customers’ response

These are self-checks, not answers. A decision that does not say what happens to the crew is not yet a decision.

18.4.4 Phase 4: Standards and the Memo

Phase 4 at a glance

• Requirement 9: Revise the standards, and measure what they mean for the statements (Chapter 9)
• Requirement 10: Write the decision memo

Milestone 4: Standards and the memo (Requirements 9 and 10): the revised standard, its effect on the statements, and the memo.

Phase 4 turns the cost study back to the statements, and then into the memo the two decision makers will act on.

Revise the standards for the statements

Requirement 9 · Revise the standards, and measure what they mean for the statements (Chapter 9)

• Produce: a conversion rate on normal capacity, with its comparisons
• Tool: the workbook rebuilds the standard and revalues the stock
• Revisit: Chapter 9’s standard costs, and Chapter 6’s statements
• Check: the effect is measured at each year-end against the screen

The rate charges the labor rate with burden for the direct and the normal indirect hours, the overhead that varies, and the plan’s supervision and depreciation spread over the plan volume. Compare it with the current rate, the time-driven rate and the base year’s actual cost, and explain why a standard on actual cost would carry idle capacity into inventory. Revalue the manufactured finished goods made since the ledger opened and on hand at each year-end, and measure the effect on opening retained earnings, on each year’s income and on each balance sheet. Show how the answer depends on the volume you treat as normal capacity and, separately, on the indirect hours the rate allows.

Why the inventory standard uses normal capacity

• Fixed production overhead is allocated on normal capacity
• Abnormal costs, such as idle facility expense, go to the period
• A standard on actual cost would carry idle time into inventory
• Whether issued statements need correcting is a matter of evidence

This is the inventory standard of U.S. generally accepted accounting principles, ASC Topic 330. The company issued its last two years’ statements to its shareholders, so Requirement 9 asks what evidence would show whether the old standards misstated them, and then whether any correction belongs in the next statements or calls for revised ones, and what the CFO should tell the shareholders. A plan for next year does not by itself show an error.

Write the decision memo

Requirement 10 · Write the decision memo

• A memo of at most two pages, with an appendix of exhibits
• A decision table for each quoted family and each below the floor
• Each row: what to do, the annual effect, the one-time cost, its condition
• Close with the standards, the statements and the production manager’s call

The memo goes to the CFO and the production manager, two people who disagree, so it gives each the evidence they need and leaves the crew decision with the production manager. The appendix of exhibits is at most three pages. Close with the standards you propose, what the base year’s statements need, and the one decision that only the production manager can make.

Milestone 4: before you hand it in

• The proposed standard states its capacity and its comparisons
• The effect on the statements is measured, and the evidence named
• The decision table covers each quoted family and each below the floor
• The memo keeps to its page limits and leaves the crew decision open

These are self-checks, not answers. Each recommendation should say what it depends on, so that two people who disagree can act on it.

18.5 Deliverables and Checklist

Before you submit

• Every query runs top to bottom, under its two comment lines
• Every assumption lives in one cell of the Assumptions sheet
• Every figure reconciles to the variance and clearing accounts
• Each file opens and refreshes on another computer

This case brought back earlier answers. Chapters 10 to 12 found more hours paid and recorded than the plant’s output needed at standard. Here the routings estimated the capacity left unused, which no product should carry, and that estimate is not a finding that anyone did no work or that every hour could be removed. Chapter 7 found that a promotion needed more lift than the orders showed, which is part of the evidence the price increases rest on. And the base year’s statements came back too, because a cost study can raise the question of what the statements should have said.

18.7 Looking Ahead

What the case practiced

• Descriptive: what the families earned and used of the plant
• Diagnostic: why the variance grew and where the cost really sits
• Predictive: what freed capacity, growth and higher prices would do under stated assumptions
• Prescriptive: whether to make, buy or reprice, and the standards

These are the four types of analytics of Chapter 1. Requirements 1 and 3 were descriptive, 2 and 4 diagnostic, and 7 and 8 predictive as scenarios, not forecasts of demand; the recommendations were prescriptive, as decisions usually are.

The next round

• Quotes expire, crews change, and prices move
• The workbook and the explorer are tools for the next decision
• Costing on practical capacity each year shows idle capacity early
• Reviewing the standards every year keeps them from going stale

A plant that measures its costs on practical capacity every year sees idle capacity while it is still small, and a company that reviews its standards every year never has to explain years of stale ones at once.

About these slides

These slides accompany Accounting Analytics: An Integrated Approach, licensed under CC BY-SA 4.0. Every figure and table comes from the chapter:

https://aa.accountinganalyticshub.com/chapters/18-make-buy-or-reprice/chapter.html

Students can find the full case, with every requirement and its tasks, in the online chapter.