| Course | ACC 311 Cost Accounting |
|---|---|
| Module | Module 7 |
| Paper type | undergraduate relevant cost decision memo (make or buy) |
| Length | About 880 words, 5 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 311 Module 7
Memorandum
To: Owner, Kettle River Truck Equipment
From: [Student Name], Cost Accounting Analyst
Date: [Date]
Re: Make or buy: hydraulic valve kits
Recommendation
I recommend that we stop machining hydraulic valve kits in-house and buy them from the outside supplier, beginning with half of next year's volume in the off-season and moving to full purchase if quality targets are met. Buying saves about $16,200 a year once we count the value of using our CNC machine and machinist to make the spreader frames we now buy outside. On cost alone, before that opportunity is considered, making the kits is cheaper, so the decision depends on putting the freed capacity to work.
The Costs That Matter
We use about 900 valve kits a year. Our accounting records show a full cost of $570 per kit. The supplier has offered a three-year price of $520 per kit, and freight adds $12. At first glance, buying saves $38 per kit. That comparison is misleading, because not all of the $570 would disappear if we stopped making kits.
Of the $120 per kit of fixed overhead, $80 is an allocated share of building depreciation, heat, the shop office and plant supervision. Those costs will continue whether or not we make kits, so they are not relevant. The other $40 per kit is the salary of the lead machinist assigned to the kit cell, $36,000 a year, which would be avoided if production stopped, since he would move to other work that we would otherwise pay for. The CNC machine we bought two years ago for $140,000 is a sunk cost: we cannot recover it by either choice, so its original price does not enter the analysis.
Table 1. Relevant Cost per Kit to Make Versus Buy
| Cost | Make | Buy |
|---|---|---|
| Direct materials | $310 | |
| Direct labor | $95 | |
| Variable overhead | $45 | |
| Avoidable fixed cost (lead machinist) | $40 | |
| Purchase price | $520 | |
| Freight | $12 | |
| Relevant cost per kit | $490 | $532 |
| Annual relevant cost (900 kits) | $441,000 | $478,800 |
On these figures, making is cheaper by $42 a kit, or $37,800 a year. If the freed machine time had no other use, we should keep making the kits. Datar and Rajan (2021) stress that the relevant comparison is always between the alternatives as they actually exist, not between a purchase price and an accounting cost per unit.
The Value of Freed Capacity
The machine time does have another use. We now buy 1,200 welded frame assemblies a year for the new salt spreader line, four per spreader, at $185 each. If the kit cell stopped, the CNC machine and the lead machinist could make those frames for $140 each in materials, labor and variable overhead, saving $45 a frame, or $54,000 a year. That saving is an opportunity cost of continuing to make valve kits.
Table 2. Annual Comparison Including Opportunity Cost
| Item | Make kits | Buy kits |
|---|---|---|
| Relevant cost of kits | $441,000 | $478,800 |
| Savings forgone on spreader frames | $54,000 | |
| Total relevant cost | $495,000 | $478,800 |
| Advantage | Buy, by $16,200 |
With the opportunity cost included, buying is cheaper by $16,200 a year. This advantage depends on the spreader line selling the 300 units that justify 1,200 frames; at lower volumes the saving shrinks. Balakrishnan et al. (2012) caution that a product cost figure can lead a decision astray when the capacity it consumes has a different value in another use, which is exactly the situation here.
Qualitative Factors
The numbers favor buying, but three qualitative factors could change that.
Quality. Valve kits control plow lift and angle, and a failure in a storm is both a safety risk and a warranty cost. Our in-house kits have a field failure rate under 0.5 percent. The supplier's references report similar figures, but we have no history with them. The contract should include a quality clause allowing return of defective lots and a warranty reimbursement for field failures.
Supply and lead time. Our busiest months are September through December, when municipal trucks must be finished before the first snow. A supplier that ships late in October could delay an entire city fleet. Gilley and Rasheed (2000) found that outsourcing peripheral activities does not reliably improve firm performance and can harm it when it weakens control over activities that matter competitively. Valve kits are not our core product, but timely delivery of finished trucks is, so we should keep the ability to produce kits for at least the first year.
People. The lead machinist is not losing his job; he would move to spreader frames. Two kit assemblers would also shift to the spreader line. Telling them early and explaining the reason will matter for morale in a sixty-person shop.
Implementation
I recommend a staged switch: buy 450 kits for delivery between February and July, keep the kit cell's fixtures and programs in place, and compare the supplier's quality and delivery with our own over that period. If the supplier's defect rate stays below 1 percent and every shipment arrives on time, move to full purchase for the following season. A three-year contract should include price protection, a quality clause and a clause allowing us to reduce volume with notice.
Conclusion
Making valve kits is cheaper only if our machine time has no better use. It does: the same capacity can make spreader frames and save $54,000 a year. Including that opportunity cost, buying the kits saves about $16,200 a year. A staged switch with quality and delivery safeguards captures the saving while protecting the fall build season.
References
Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012). Product costs as decision aids: An analysis of alternative approaches (Part 1). Accounting Horizons, 26(1), 1-20. https://doi.org/10.2308/acch-50086
Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.
Gilley, K. M., & Rasheed, A. (2000). Making more by doing less: An analysis of outsourcing and its effects on firm performance. Journal of Management, 26(4), 763-790. https://doi.org/10.1177/014920630002600408
What the ACC 311 Module 7 instructions ask for
Project Two in ACC 311 usually asks you to advise management on a short-term decision using relevant cost analysis, such as making or buying a component, accepting a special order, dropping a product line or using a constrained resource. Many versions ask for a memo or report to a named manager. Identify which costs and revenues differ between the alternatives and which do not, explain why sunk costs and unavoidable allocated costs are irrelevant, include any opportunity cost, and present the comparison in a table. Then discuss qualitative factors, such as quality, reliability, employees and strategy, and give a clear recommendation. Write for a manager: lead with the answer, keep the analysis tight and put the supporting detail in tables.
How this ACC 311 Module 7 project two example is built
The memo opens with its recommendation. A table shows the shop's full cost of making a valve kit, $570, and then removes the $80 of allocated fixed overhead that would continue if production stopped, leaving a relevant cost of $490 against a purchase cost of $532 with freight. On those figures, making saves $37,800 a year. The memo then adds the opportunity cost: the freed CNC machine and machinist could produce spreader frames now bought outside, worth $54,000 a year. With that included, buying is $16,200 cheaper. A section on qualitative factors weighs supplier quality, peak-season lead times and the machinist's job. The recommendation is to buy, with a staged switch and a quality clause.
Where the ACC 311 Module 7 rubric puts the points
Rubrics for ACC 311 Project Two generally score identification of relevant costs and revenues, correct exclusion of irrelevant ones, the quantitative comparison, the treatment of qualitative factors and the recommendation, with rows for format and writing. The top band requires the analysis to be correct and explained, so a reader can see why allocated overhead or a sunk cost was excluded. Graders reward memos that include opportunity costs where they apply and that consider qualitative factors seriously rather than listing them. A professional memo format with the recommendation stated early is often part of the grade. Recommendations that do not follow from the numbers, or that ignore an important risk, lose points under critical thinking.
ACC 311 Module 7 help: the mistakes that cost points
The biggest mistakes in this project are comparing the purchase price with the full cost per unit, including allocated fixed overhead that will not go away, and counting the original cost of equipment already bought. Students also leave out opportunity costs, which can reverse the answer, and treat qualitative factors as an afterthought. If your project is a special order, a product line decision or a constrained resource problem, send the guidelines and data and the memo will follow that decision. Before you write, list every cost and mark it as differing or not differing between the alternatives; the costs that differ are the only ones that belong in the comparison table, and that discipline keeps the memo short.
Get ACC 311 Module 7 written to your instructions
Send the ACC 311 Project Two guidelines, the cost data and the rubric. The memo will separate relevant from irrelevant costs, include opportunity costs, weigh qualitative factors and make a clear recommendation in a format a manager can act on. A first sample is free, usually back in two days. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 311 Module 7 questions, answered
Where can I find a free ACC 311 Module 7 Project Two sample?
This page shows a complete ACC 311 Module 7 Project Two memo analyzing whether to make or buy hydraulic valve kits using relevant costs.
What is a relevant cost?
Any cost still to come that changes depending on which option is chosen. A cost identical across the options, or one already spent, cannot change the answer and is left out.
Why is allocated fixed overhead often irrelevant in a make-or-buy decision?
Because much of it, such as building depreciation or plant management, will continue whether or not the part is made. Only the avoidable portion is relevant.
What is an opportunity cost in make or buy?
The benefit given up by using capacity to make the part instead of using it for the next best alternative, such as making another product.
What qualitative factors matter in make-or-buy decisions?
Supplier quality and reliability, lead times, control over design, the effect on employees and the long-term strategic importance of the component.