What is make or buy decision in cost accounting?

A make-or-buy decision refers to an act of using cost-benefit to make a strategic choice between manufacturing a product in-house or purchasing from an external supplier. It arises when a producing company faces a diminishing capacity, experiences problems with the current suppliers, or sees changing demand.

What is make or buy decision in management accounting?

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.

When to use make and buy decision making How do you compute?

Compare the relevant cost of in-house production with the cost of acquiring product or service externally. If the internal cost exceeds the external price, it is better to buy. If the internal cost exceeds the external price, it is better to buy. If the external price exceeds the internal cost, it is better to make.

How is a make or buy decision made?

Generally, managers choose the option that will allow them to save on costs. The variable cost of manufacturing the product is compared with the purchase price of the product when bought from an outside supplier. Avoidable fixed costs and opportunity costs are also considered in the analysis.

How is purchase decision based on financial factors?

The decision is based on both financial and non-financial factors. In general proposed purchased price is compared with the marginal cost of production. If marginal cost of the production are more than the price offered by the outside supplier then clearly buying goods in finished form is a better option.

Which is a valid consideration in a make or buy decision?

Make or buy is a valid consideration in any cost reduction or product improvement programme. Advantages and disadvantages of possible alternatives should be evaluated and the choice that identifies the minimum cost makes for the final decision.

How is a complete or accept decision made?

A complete or accept decision can be made using quantitative or qualitative research and most of the time, the results of quantitative analysis (cost-benefit analysis) are enough to decide on whether to make the product in-house or buy (outsource) from outside suppliers. How Does Make or Buy Decision Work?

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