A manufacturer uses standard costing, and a potential supplier uses activity-based costing. This difference most likely will have implications for which of the following types of future decisions?
The use of different costing methods by a manufacturer and a potential supplier can have significant implications for make-or-buy decisions. Here’s the explanation:
Standard Costing: This method involves assigning fixed costs to products based on predetermined standards. It simplifies cost control and variance analysis but may not capture all the activities involved in production.
Activity-Based Costing (ABC): ABC assigns costs based on actual activities and resource usage, providing a more accurate picture of costs associated with specific products or services.
Comparison for Make-or-Buy: When a manufacturer using standard costing considers outsourcing to a supplier using ABC, it must carefully compare the detailed activity-based costs with its own standard costs.
Implications: Differences in cost allocation methods can reveal hidden costs or savings, influencing the decision to manufacture in-house or outsource. ABC may highlight inefficiencies in in-house production or justify the cost-effectiveness of outsourcing.
Strategic Decisions: Understanding the true cost implications through detailed ABC can lead to better strategic decisions regarding resource allocation, production processes, and supplier selection.
References
Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.
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