What question did this study set out to answer?

The aim is to determine whether services should be produced internally or acquired externally based on cost data.

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March 18, 2026

Internal Versus External Acquisition of Services When Reciprocal Services Exist.

Key Points

The aim is to determine whether services should be produced internally or acquired externally based on cost data.
Detailed example illustrating decision-making process
Use of cost allocation methods for service departments
Examination of variable and nonvariable service department costs
Identification of key cost data needed for decision-making
Demonstration of using simultaneous equation method for accurate analysis
Insights on the impact of closing multiple service departments on overall costs

Abstract

Abstract ABSTRACT: This paper presents a detailed example regarding whether to continue to generate service internally or to acquire the service externally. The example demonstrates that most of the basic data required for the correct decision on closing one service department can be obtained from the information normally presumed to be available when service department costs are allocated to producing departments by the algebraic (simultaneous equation) method. The example includes variable and nonvariable service department costs. Finally, the decision to close more than one service department is examined.

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