Slides 3 2 recommend a course of action in outsourcing and k
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Recommend a Course of Action
in Outsourcing (Relevant Cost)
1
What will influence your decision?
• Two cars: same model, same price, same engine, same
features and accessories, same financing
2
Terminal Learning Objective
• Task: Recommend A Course of Action in Outsourcing
and Keep or Replace Decisions.
• Condition: You are training to become an ACE with
access to ICAM course handouts, readings, and
spreadsheet tools and awareness of Operational
Environment (OE)/Contemporary Operational
Environment (COE) variables and actors
• Standard: With at least 80% accuracy:
• Explain relevant costs
• Identify relevant costs in an outsourcing decision
• Identify relevant costs in a keep-or-replace decision
3
What is Relevant?
• Synonyms for relevant: pertinent, applicable, related,
appropriate, significant, important
• We have access to more information than ever
• Not every piece of information is pertinent, applicable, or
related to a decision
• Example: fuel economy on new car models is not pertinent to
a decision about whether to pursue your Master’s degree
4
What is Relevant?
• Some pieces of information can be easily dismissed as
unrelated or irrelevant
• Other times it is more difficult to determine what is
appropriate, significant, or important to the decision
• Especially when the information is printed on an official report
from the accounting system
• Remember that the accounting system measures according to
external requirements
5
What is Relevant?
• Relevant costs are those costs that change as a result of a
decision
• Identify the decision at hand
• Choice between two Courses of Action (COA)
• Frequently one of the options is status quo
• Identify related costs
• Which costs are the same for both courses of action? Which
will change?
6
Cost Definitions
• Acquisition cost – all costs related to purchasing
an asset and placing it into service
• Operating cost – all costs related to operating an
asset
• Opportunity cost – the value of what is given up
when choosing a particular course of action
• Sunk cost – costs incurred in the past that cannot
be recovered
• Incremental cost – the additional cost incurred as
the result of a decision
7
Cost Definitions
• Avoidable cost – cost we currently incur that would be
eliminated or avoided by choosing another course of action
• Unavoidable cost – cost we currently incur that would NOT be
eliminated or avoided by choosing another course of action
8
Classic Relevant Cost Problems
• Outsourcing – Should we provide this service in-house or
purchase from a contractor?
• Keep or replace – Should we keep the equipment we have or
replace with more efficient equipment?
• These are the two most applicable to government entities
9
Classic Relevant Cost Problems
• Additional business at reduced price – Should we accept or
reject additional business at a reduced price?
• Scrap or re-work – Should we invest additional resources to
bring the item up to standards or cut our losses?
• While less common, these also have government applications
10
A Template for Organizing the Data
• Based on the Statement of Activities
Item
COA #1
COA #2
Δ
Revenue or Benefit
Revenue
COA #1
Revenue
COA #2
#2 - #1
Related Cost A
Cost A from
COA #1
Cost A from
COA #2
#2 - #1
Related Cost B
Cost B from
COA #1
Cost B from
COA #2
#2 - #1
Net Change
(Rev – Cost)
Rev – Costs
Rev – Costs
#2 - #1
11
A Template for Organizing the Data
• Based on the Statement of Activities
Item
COA #1
COA #2
Δ
Revenue
Benefit
COA #1 or
may
be the
status quo
Related Cost A
Revenue
COA #1
Revenue
COA #2
#2 - #1
Cost A from
COA #1
Cost A from
COA #2
#2 - #1
Related Cost B
Cost B from
COA #1
Cost B from
COA #2
#2 - #1
Net Change
(Rev – Cost)
Rev – Costs
Rev – Costs
#2 - #1
12
A Template for Organizing the Data
• Based on the Statement of Activities
Item
COA #1
COA #2
Δ
Revenue or Benefit
Revenue
COA #1
Revenue
COA #2
#2 - #1
Cost A from
Related
Cost
A
Define revenues or
COA #1
quantifiable benefits
Cost B from
Related
fromCost
eachBCOA
COA #1
Cost A from
COA #2
#2 - #1
Cost B from
COA #2
#2 - #1
Net Change
(Rev – Cost)
Rev – Costs
#2 - #1
Rev – Costs
13
A Template for Organizing the Data
• Based on the Statement of Activities
Item
Revenue or Benefit
Related Cost A
COA #1
COA #2
Revenue
Revenue
Express
COA Δ#1as Favorable
COA #2
or (Unfavorable)
Cost A from Cost A from
COA #1
COA #2
Δ
#2 - #1
#2 - #1
Related Cost B
Cost B from
COA #1
Cost B from
COA #2
#2 - #1
Net Change
(Rev – Cost)
Rev – Costs
Rev – Costs
#2 - #1
14
A Template for Organizing the Data
• Based on the Statement of Activities
Item
Revenue or Benefit
Related Cost A
Related Cost B
Net Change
(Rev – Cost)
COA #1
COA #2
Revenue
Revenue
If the
same#2
COAitem
#1 is the COA
for COA #1 and COA #2
Cost A from Cost A from
the Δ#1will be -0COA
COA #2
indicating the item is
Cost
B from toCost
irrelevant
theB from
COA decision
#1
COA #2
Rev – Costs
Rev – Costs
Δ
#2 - #1
#2 - #1
#2 - #1
#2 - #1
15
Learning Check
• How are relevant costs defined?
• How does the table format help to identify irrelevant costs?
16
Outsourcing
• Decision: Outsource HR function for $200,000
per year or keep in-house?
• Direct labor cost = four employees @ $50,000 per
employee annually
• Two would be laid off, two would be transferred to
another command
• Unemployment taxes would increase $10,000 per
year due to the layoffs
• Facilities and equipment cost = $35,000 per year
• Would remain idle
• Other operating costs = $15,000 per year
• Would be eliminated
17
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
18
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
19
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
20
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
21
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
22
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
23
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
24
Outsourcing
Item
In-house
Outsource
Δ
-0-
-0-
-0-
$200,000
-0-
$200,000
Cost of HR contract
-0-
$200,000
(200,000)
Unemployment tax
-0-
10,000
(10,000)
Facilities/Equipment
35,000
35,000
-0-
Other operating cost
15,000
-0-
15,000
-250,000
-245,000
5,000
Revenue or Benefit
Direct labor
Net Change
25
