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CMA Foundation · Fundamentals of Financial and Cost Accounting · Meaning and Significance of Cost Accounting and its Relationship with Financial Accounting

Under which situation does cost accounting provide direct help in a make-or-buy decision for a component?

Cost accounting assists a make-or-buy decision by supplying the relevant incremental cost of manufacturing the component in-house, which is compared with the supplier's quoted price. The cheaper relevant cost option is preferred. Share prices, filings or cash balances do not measure the cost difference.

  1. AComparing the relevant incremental cost of making the component with the price quoted by an outside supplierCorrect
  2. BComparing the share price of the firm with the supplier's share price
  3. CChecking whether the supplier has filed its annual return
  4. DTotalling the firm's cash balance at the year end

Explanation

Make-or-buy decisions rest on comparing the relevant cost of internal production, meaning the costs that would change, with the external purchase price. The other options give no cost information for the decision.

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