“Keep your eyes on the prize”, Alice Wine

In business, it is easy to lose track of time. This occurs due to full meeting schedules, the busy nature of certain jobs and tasks, impending deadlines, and everyday life. Consequently, it is understandable that the direction of the organization can sometimes become displaced from our thoughts. The step-by-step divergence from the mission, vision, and goals can occur through various day-to-day, or even minute-to-minute, activities that distract the organization, which leads to the negative trend of a “death spiral” (i.e., the point of no return that prevents the organization from realizing its goals).  In this case, outsourcing is capable of producing this negative effect on an organization.

The basic make-versus-buy analysis is simple to understand but sometimes difficult to implement as there are direct and indirect costs associated with the overall decision. These include labor, material, and overhead.  Many companies utilize the make-versus-buy analysis calculation, which can be found in accounting books and various websites, but this is short-sighted. There are other issues that go beyond these stated costs. For many organizations, completing the work internally produces many advantages that are not reflected in the standard make-versus-buy analysis.  Another factor to consider is the timing of the accounting treatment of the make versus buy analysis can lead to over or under applied indirect cost (overhead).   Please note that this is not limited to manufacturing organizations — this is an issue for service organizations as well.

The focus of this article is to identify the issues beyond the basic make-versus-buy analysis and other complications that occur with absorption cost accounting and outsourcing (purchase) of the operation’s internal production. Examples will provide a clear illustration of the possible scenarios of this complex accounting application.

Published:  Journal of Cost Management.  September / October 2017 Issue.

Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior

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