Performance Management

B5: Decision Making Techniques | Make or Buy and Other Short Term Decisions (ACCA F5)

B5- Make or Buy and Other Short Term Decisions

Make or Buy and Other Short Term Decisions looks at issues surrounding make vs. buy and outsourcing decisions, how to calculate and compare make costs with buy costs, compares in-house and outsource costs and how to apply relevant costing principles in specific situations.

Make or Buy and Other Short Term Decisions

a) Explain the issues surrounding make vs. buy and outsourcing decisions.

The make or buy decision is a choice between making the items or buying them. Making items gives the company more control over the work, but buying the items provides an opportunity to gain products that are made by specialists and experts.

To make this decision, the organization has to figure out if it can effectively manufacture the goods in house (i.e. if there are no limiting factors). If there is a limiting factor, the organization has to decide which items can be made internally and which items should be made externally.

b) Calculate and compare “make” costs with “buy-in” costs.

For examples which show how to calculate and compare “make” costs with “buy-in” costs, please refer to BPP’s ACCA F5 Performance Management Study Text.

c) Compare in-house costs and outsource costs of completing tasks and consider other issues surrounding this decision.

For examples which show how to compare in-house and outsource costs, please refer to BPP’s ACCA F5 Performance Management Study Text.

d) Apply relevant costing principles in situations involving shut down, one-off contracts and the further processing of joint products.

A shut down decision is “whether to close down an operation or stop making and selling a particular product or service.” This type of decision is made if losses are being made or if costs are too expensive. The organization has to decide if the shut down will be permanent or temporary.

Shutdown decisions can involve both short term and long term considerations. They will impact annual operating costs, employees, the use and possible sale of assets and capital expenditures and revenues.

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