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 difference in costing methods between a manufacturer using standard costing and a potential supplier using activity-based costing most likely has implications for "B. Make-or-buy" decisions.
Explanation:
Standard costing:
This method uses predetermined costs for direct materials, direct labor, and overhead, which can simplify pricing and cost estimations. However, it might not accurately reflect the actual costs of specific products, especially if there are complex production processes or variations in materials.
Activity-based costing (ABC):
This method assigns costs more accurately based on the resources consumed by different activities involved in production. This can reveal hidden costs associated with individual products or components, leading to a more precise understanding of their profitability.
Why other options are less likely:
A. Price concessions:
While the difference in costing methods might influence negotiations, price concessions are more likely to be driven by market factors, competitive pressures, and overall business strategy rather than just the specific costing approach used by one party.
The correct answer is:
**B. Make-or-buy**
The difference in costing methods (standard costing vs. activity-based costing) is most likely to impact **make-or-buy decisions**. This is because these decisions rely heavily on accurate cost comparisons between internal production (using standard costing) and external procurement (using activity-based costing). Activity-based costing (ABC) provides a more detailed and accurate allocation of overhead costs, which could reveal different cost structures compared to standard costing. This discrepancy could influence whether the manufacturer decides to produce in-house or outsource to the supplier.
While price concessions (A) could be indirectly affected, the primary impact is on make-or-buy decisions, as these require a detailed and accurate cost analysis. Distribution warehouse locations (C) and freight terms (D) are less likely to be directly influenced by the costing method difference.
B, because if the supplier is constantly changing their prices and the manufacturer stays consistent it will eventually need to consider if its more cost effective to produce in house rather than deal with fluctuations.
Answer is B, since you can't make an informed make/buy decision if both parties are measuring cost differently.
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