Make or Buy Analysis
CPA Auditing and Attestation (AUD) · Learn by Concept
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CPA Auditing and Attestation (AUD) › Make or Buy Analysis
Which of the following statements is true regarding opportunity cost?
The potential benefit is not sacrificed when selecting an alternative
Opportunity cost is representative of actual dollar outlay
Opportunity cost is recorded in the accounts of an organization that has a full costing system
Idle space that has no alternative use has an opportunity cost of zero.
Explanation
Opportunity cost is the potential benefit lost by selecting a particular course of action. If idle space has no alternative use, there is no benefit foregone, opportunity cost is zero.
Costs relevant to a make or buy decision include variable labor and variable materials as well as:
Factory management costs
Depreciation
Avoidable fixed costs
Property taxes
Explanation
Avoidable fixed costs attach to a specific decision and are incurred only if that decision is taken. They are relevant in marginal analysis.
An important concept in decision making is described as "the contribution to income that is foregone by not using a limited resource to its best alternative use." This concept is called:
Marginal cost
Opportunity cost
Irrelevant cost
Incremental cost
Explanation
Opportunity cost is the contribution to income that is foregone by not using a limited resource for its best alternative use.
Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is:
Statement of cost of goods sold
Capital expenditure plan
Statement of cash flows
Income statement
Explanation
The statement of cash flows is the last pro forma statement prepared.
The cash receipts budget includes:
Interest expense
Funded depreciation
Loan proceeds
Extinguishment of debt
Explanation
The cash receipts budget includes loan proceeds.
Which of the following factors would assist in a make or buy analysis?
Cash inflows
Cash outflows
Both
Neither
Explanation
In assessing how much a decision will cost, as well as how much cash that decision will bring in, a firm can accurately deduce which option is in their best interest.