Question

how Make or Buy Decision works in acc cost ?

and the way you can analyse the table of the make or buy

in your own words write an essay

Answer 1

Make decision means manufacturing the product or item within the premises by the user itself. Product is manufactured or produced by the user rather than buying it from the market.

Buy decision means buying the product from the market by paying a consideration.

In make or buy decision cost associated with the Make the product or Buy the product is compared and analysis is done by comparing both as per cost accounting principles to identify which proposal is more beneficial. Whether in house production is more cost effective or buying from market is cheaper option.

We analyse both the options ie Make decision or buy decision in cost accounting.

Under Make decision : Cost of material then cost of labour, direct expenses associated with the production of product is added to calculate the cost of production or making.

While calculating the cost it is considered whether a cost is relevant or not example is ideal labour hours are available the cost of labour is nil in cost of making. That means only relevant cost is considered and irrelevant cost is ignored.

Moreover sunk cost are also ignored and not considered for calculation of cost of making.

Under buy decision : Purchase cost is taken and any direct cost associated with the buying such as commission or transportation of product is also added to the buying cost.

Along with this other factors are also considered such as :

1) Whether timely delivery will be made by the seller in case of buying from market.

2) Goodwill of seller and quality of product is is considered.