In deciding whether to manufacture a part or buy it from an outside supplier, which of the following is an irrelevant cost?
A) Direct labour
B) Variable overhead
C) Fixed overhead that will be avoided if the part is purchased from an outside supplier
D) Fixed overhead that will continue even if the part is purchased from an outside supplier

Question

Quizplus · Accepted Answer

Fixed overhead that will continue even if the part is purchased from an outside supplier is an irrelevant cost because it will be incurred regardless of the decision to either manufacture the part or purchase it from an outside supplier. The relevant costs are direct labor and variable overhead, as these costs will vary depending on whether the company manufactures the part or purchases it from an outside supplier. Additionally, fixed overhead that can be avoided if the part is purchased from an outside supplier is relevant because it will reduce the overall cost if the company chooses to purchase the part from an outside supplier.

In Deciding Whether to Manufacture a Part or Buy It