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ACCA Applied Knowledge · Business and Technology · The relationship between accounting and other business functions

Dalton Co is deciding whether to make a component in-house or buy it from an external supplier. Spare capacity exists in the factory and the fixed overheads will be incurred whichever option is chosen. Which cost information is most relevant for the accountant to provide to operations management?

The accountant should provide the incremental, avoidable costs of making the component in-house compared with the external purchase price. Fixed overheads and historic machine costs are incurred anyway, so they are irrelevant. Full absorption cost would wrongly include unavoidable apportioned overheads and distort the decision.

  1. AThe full absorption cost per unit including apportioned fixed overheads
  2. BThe historic cost of the machinery used to make the component
  3. CThe incremental (avoidable) costs of in-house manufacture compared with the purchase priceCorrect
  4. DThe selling price of the finished product containing the component

Explanation

Decisions should be based on relevant costs, those that differ between alternatives. Fixed overheads are incurred either way, so they are irrelevant, as is historic machinery cost. The comparison is between avoidable in-house costs and the external price. Option A is wrong because it includes unavoidable apportioned overheads.

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