Question

Fixed manufacturing overhead is a relevant cost to consider when making a decision on an keep/drop or make-or-buy decision.

Group of answer choices

True

False

Answer 1

The costs which should be used for decision making are often referred to as "relevant costs

To affect a decision a cost must be:

a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.

b) Incremental: -Meaning, expenditure which will be incurred or avoided as a result of making a decision. Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision.

c) Cash flow:-Expenses such as depreciation are not cash flows and are therefore not relevant. likewise, the book value of existing equipment is irrelevant, but the disposal value is relevant.

And

The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier).

so since fixed manufacturing cost is unavoidable and it is to be incurred even though we are buying the product from outside supplier and it can not affect our decision regarding producing a product or buying it from outside therefore its not relevant to our decision making process however if you are incurring incremental fixed cost due to production of product in house which we will not incurred if you buy same product from outside then it is relevant for our decision making process .