The use of different costing methods by a manufacturer and a potential supplier can have significant implications for make-or-buy decisions. Here's the explanation:
* Standard Costing: This method involves assigning fixed costs to products based on predetermined standards. It simplifies cost control and variance analysis but may not capture all the activities involved in production.
* Activity-Based Costing (ABC): ABC assigns costs based on actual activities and resource usage, providing a more accurate picture of costs associated with specific products or services.
* Comparison for Make-or-Buy: When a manufacturer using standard costing considers outsourcing to a supplier using ABC, it must carefully compare the detailed activity-based costs with its own standard costs.
* Implications: Differences in cost allocation methods can reveal hidden costs or savings, influencing the decision to manufacture in-house or outsource. ABC may highlight inefficiencies in in-house production or justify the cost-effectiveness of outsourcing.
* Strategic Decisions: Understanding the true cost implications through detailed ABC can lead to better strategic decisions regarding resource allocation, production processes, and supplier selection.
References
* Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis.
Pearson.
* Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.