Make or Buy decisions

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                  When a business concern requires a product / any part/component of the product for its existing unit, it has to decide whether it should make the product, part, or component or buy it from other manufacturers. There are many costing and non costing considerations guiding the decision to make or buy it. some of the important factors affecting such decision are:

1. whether for manufacture infrastructural facilities are available

2. whether the present capacity of the undertaking is. fully utilised. if not, it can be utilised in making the required product.

3. if an additional unit is required for manufacture the required product , the concern possesses adequate funds for establishing the unit and the whole production of the unit will be consumed by the concern or there is market for the sale of extra production

4.whether the product is available in the market easily and at reasonable terms

5. if the cost of manufacture of a product/ component is lower than the cost of purchase, it may be manufactured.

6. if the product is not manufactured it has to be imported then import trade control regulations and foreign exchange control regulations have also a role.

7. if there is change in technology in production of that product, the concern will be in a position to acquire the new technology without much difficulty. if the product has to be imported , if not manufactured, and such product may tell upon the security of the country , it must be manufactured in the country, whatever the cost of manufacture may be. 
Tax  Considerations  : 

 1. If a concern has the surplus capacity & even decides to buy a product it may require to sell a part of its plant & machinery. In such a case it may be liable to capital gains tax.

 2. If a new industrial undertaking (unit) is established to make the product , which fulfills the conditions laid down in sec 80-IB / sec 80- IC of the act , a deduction will be allowed in computing the income of the undertaking for tax purposes.

 3. If the product, either manufactured/ purchased , is a capital asset,its cost will not be allowed as a deduction in computing the income. However, if the asset is such on which depreciations is allowed, it will be allowed in both the cases ,that is , manufactured / purchased.

 4. If the product is a consumable one, raw material is required to replace a worn out part at the time of repair, its cost will be treated as revenue expenditure& deductible in computing the income.

         

Comments

  1. endsendsends03December 28, 2020 at 10:53 AM

    Great Post.
    Thanks for sharing such an informative post with us and also Accounts in Austin

    ReplyDelete

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