Make or Buy Decision in Accounting

The video tutorial discusses the make or buy decision, which involves choosing between producing a product in-house or outsourcing it to a third party. The decision should be based on comparing the cost of purchasing the item to the incremental cost of making it. Key considerations include avoidable costs, opportunity costs, and qualitative factors such as supplier reliability and quality control. An example is provided where a company evaluates whether to make or buy table legs, considering both cost and qualitative factors. The analysis concludes that making the legs in-house is more cost-effective.

What is the primary consideration when deciding whether to make or buy a product?

• The size of the product

• The popularity of the product

• The incremental cost of making versus buying

• The color of the product

Which qualitative factor involves assessing the reliability of suppliers?

• Opportunity cost

• Direct material cost

• Supplier reliability

• Variable overhead

Why is quality assurance a concern in the make-or-buy decision?

• Because it affects the color of the product

• Because it determines the production speed

• Because it impacts control over product quality

• Because it influences the size of the product

In the example provided, what is the cost of making a set of table legs in-house?

• $40 per set

• $45 per set

• $53 per set

• $38 per set

What is the final decision in the example regarding making or buying the table legs?

• Stop producing tables

• Outsource to multiple suppliers

• Make the legs in-house

• Buy the legs from the supplier