An organization compares internal HR implementation expenses to external vendor features and decides to purchase from the external vendor. Which approach was used?

• A. Transaction cost theory
• B. Activity-based costing
• C. Cost-benefit analysis
• D. Return on investment

Answer: (A)

Transaction cost theory examines the costs of coordinating activities across organizational boundaries, including search, negotiation, contracting, monitoring, and enforcement. When an organization compares what it would spend to implement HR internally with what an external vendor offers, it is weighing the costs of coordinating the activity inside the firm versus outsourcing it. If outsourcing reduces those transaction costs and simplifies governance, choosing the external vendor fits this theory.

Activity-based costing, by contrast, focuses on tracing overhead to activities for internal cost accuracy rather than the make-or-buy decision. Cost-benefit analysis could be used to judge overall value but doesn’t specifically emphasize the governance and transaction costs of in-house versus external provision. Return on investment centers on profitability of an investment, not the sourcing decision driven by transaction costs.