Rescinded [2016-02-02] - Guide to Costing
Hierarchy
Long description for image: Make-or-Buy Decision - Costing Case Study
Make-or-Buy Decision Process
The purpose of this make-or-buy costing model is to support the identification of the cost differential between costs avoided by not performing a service in-house and all the costs, net of any revenues, of having the service performed externally.
In-House Services
To identify the costs of In-House services, first:
- Determine relevant ongoing costs of service
- Determine direct and indirect costs
- Determine assignment of costs
- Determine which costs would be totally or partially avoidable
Then, calculate avoidable costs (based on assignment methods) to arrive at the net present value of avoidable costs for In-House Services.
Outsourced Services
For the purpose of the costing model, Outsourced Services are identified as either Transitional or Ongoing.
To identify the costs of Transitional Outsourced Services, first:
- Determine relevant costs of transition
- Determine timing of costs
Next, calculate transition costs.
Following this, determine relevant one-time revenues.
Next, calculate one-time revenues then the calculate the net transitional cost to arrive at the net present value for transition costs.
To identify the costs of Ongoing Outsourced Services, first:
- Determine relevant contract administration costs of department
- Determine direct and indirect costs
- Determine assignment of costs
Calculate contract administration costs of the Department
Following this, determine ongoing revenues of department and government.
Next, calculate ongoing revenues.
Then, estimate contract price.
Next calculate net ongoing cost to arrive at the net present value of ongoing costs of outsourcing.
The Make-or-Buy Decision process can then be made based on a comparison of the Net Present Value (NPV) of Avoidable Costs (In-House Service) with the NPV of the transitional plus ongoing costs of outsourcing.