From The Caveman to CFO: An Age-Old Dilemma 📜
Whether it’s primordial humans debating if they should wrestle a saber-toothed tiger or simply buy mammoth stakes from the cave next door, the ‘Make or Buy’ decision has always been a thing! Today, you, dear modern-day accounting wizard, face the perilous task of deciding whether to produce in-house or outsource – minus the flint tools and mammoth hazards!
graph LR
A[You Have a Need 🛠️] --> B[Evaluate Costs 💵]
B --> C{Relevant Costs}
C -->|Low| D[Make In-House 🏭]
C -->|High| E[Buy from Supplier 🏪]
B --> F{Spare Capacity?}
F -->|Yes| D[Make In-House 🏭]
F -->|No| G{Opportunity Cost}
G -->|High| E[Buy from Supplier 🏪]
G -->|Low| D[Make In-House 🏭]
Counting the Bean$ or Shard$ 🤖
The archetypical ‘Make or Buy’ decision boils down to comparing the relevant costs. Here’s the juicy bit—relevant costs are the costs that will change depending on the decision you make (pun fully intended). That’s right; no more daydreaming about extraneous stuff like chewy labor contracts signed five eons ago.
Relevant Costs: The Juiciest Nuggets! 🥡
- Direct Material Costs: What’s it going to cost you in raw materials?
- Direct Labor Costs: Your in-house workers earn their golden pennies, remember!
- Variable Overheads: Keep the lights and machines running!
Secret Ingredient: Opportunity Costs 🔍
Raise your hand if you find yourself thinking,
### What is a 'make or buy decision'?
- [ ] A decision to get takeout or cook at home
- [x] A decision to manufacture in-house or outsource
- [ ] A decision to sell or buy stocks
- [ ] A decision to hire more staff or cut down workforce
> **Explanation:** A 'make or buy decision' involves determining whether to produce goods or services internally or to purchase them from external suppliers.
### What are relevant costs in the make or buy decision?
- [ ] Historical costs
- [ ] Spare capacity
- [x] Direct material and labor costs
- [ ] Depreciation costs
> **Explanation:** Relevant costs include direct material and labor costs, as they will vary depending on the decision.
### Why might opportunity costs be relevant in a make or buy decision?
- [ ] Because they affect taxes
- [x] They represent the potential benefits foregone from alternative uses of resources
- [ ] They affect company culture
- [ ] They determine CEO bonuses
> **Explanation:** Opportunity costs are relevant when resources are limited and using them in one way means they cannot be used in another potentially profitable way.
### If there's no spare capacity, what additional cost is often considered?
- [ ] Club membership fees
- [ ] Advertising costs
- [x] Opportunity costs
- [ ] Fragrance of office plants
> **Explanation:** When there's no spare capacity, opportunity costs become important as they represent the value of benefits foregone elsewhere.
### Which of the following is NOT a relevant cost?
- [ ] Direct Labor Cost
- [ ] Variable Overhead
- [x] Sunk Cost
- [ ] Direct Material Cost
> **Explanation:** Sunk costs are past costs that have already been incurred and cannot be recovered, and hence are not relevant to future decisions.
### What tool is commonly used to visualize the make or buy decision process?
- [ ] Treasure Map
- [x] Flowchart
- [ ] Mood Board
- [ ] Tattoo Sleeve
> **Explanation:** Flowcharts are often used to visually represent the decision-making process in make or buy decisions.
### Which historical figure likely did NOT make a lot of 'make or buy' decisions?
- [ ] Henry Ford
- [ ] Steve Jobs
- [x] Isaac Newton
- [ ] Warren Buffett
> **Explanation:** Isaac Newton, while brilliant in his own right, was more concerned with physics than manufacturing processes.
### Why might a company choose to buy rather than make a product?
- [ ] Lack of spare capacity
- [ ] Higher in-house costs
- [ ] Lower quality of production in-house
- [x] All of the above
> **Explanation:** A company may buy rather than make a product due to lack of spare capacity, higher costs of in-house production, or inability to meet quality standards internally.
