In a make-or-buy decision, which costs can be considered relevant
Examples of relevant costs in the context of a make or buy decision include direct labor, direct materials, variable overhead. Other costs that should be considered in this category are any incremental costs necessary for a part manufacturing. Make-or-Buy decision (also called the outsourcing decision) is a judgment made by management whether to make a component internally or buy it from the market. While making the decision, both qualitative and quantitate factors must be considered. There are costs which can be changed (avoided) and costs which cannot be avoided. The first type of costs is also called relevant costs and the second type is called irrelevant costs. Examples of relevant costs in the context of a make or buy decision include direct labor, direct materials, variable overhead. Examples of the qualitative factors in make-or-buy decision are: control over quality of the component, reliability of suppliers, impact of the decision on suppliers and customers, etc. The quantitative factors are actually the incremental costs resulting from making or buying the component. Examples of the qualitative factors in make-or-buy decision are: control over quality of the component, reliability of suppliers, impact of the decision on suppliers and customers, etc. While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the cost implications within a decision. Suppose that a firm can purchase equipment for in-house use for $250,000 and produce the needed parts for $10 each. Relevant costs are decision specific, meaning that a relevant cost may be important in one situation but irrelevant in another. Examples of when management uses relevant costs can be seen when it is determining whether to sell or keep a business unit, make or buy an item, or accept a special order. RELATED TERMS. DEFINITION of 'Make-Or-Buy Decision'. The act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the two most important factors to consider are cost and availability of production capacity. Make-or-Buy Decision. Make-or-Buy decision (also called the outsourcing decision) is a judgment made by management whether to make a component internally or buy it from the market. This chapter addresses how managers analyze costs to make short-term outsourcing decisions using incremental analysis. This type of decision is often called a 'make or buy' decision because it involves a decision of whether to continue 'making' (manufacturing) a product versus buying it from an outside company.
Direct labor, direct materials, variable overhead.