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Sub Contracting

Those operations which require special processing can be sub-contracted meaning thereby that certain specific jobs may be got done from outside an account of some particular reasons. These can be illustrated as under:

(i) Usually demand is a fluctuating phenomenon in every business. However, on special occasions extra demand may be created which may require its meetings out by performing the task or taking up the production activity in the business. It may, at times be not feasible because it is only a temporary phase and permanent facilities (labour, machine, space etc.) may not be possible to spare. In such an event outside services become essential to be engaged and the jobs completed by assigning them to sub-contractors. Payment made to them is treated as direct expenses.

(ii) In case, some job requires specialized knowledge, skill, expertise or use of specific machinery or equipment, which are not available in-house, the business may have to hire the service of outsiders. In such circumstances also whatever payments (hire charges, fees paid to technical people etc.) are made to them are regarded as direct expenses chargeable to those particular jobs or work orders.

(iii) In the situation mentioned under no. (ii), sometimes, the management may decide to hire special machinery or make expertise available in house. As it may expect repeated orders, it may favour allotment of jobs which require use of common facilities (labour, technical personnel, machinery or equipment) to outsiders from time to time. Any such expenditure incurred on sub-contracting is a direct expense.