It depends upon the respective sheets of plywood and the length of the
dado/cut. With rough (CDX) stuff more tolerance is required.
Similarly, as the length of the dado/cut is increased - e,g, slot is
longer - more tolerance may be required. Conversly with a xmall slot,
A/C or better sanded ten-ply furniture-grade plywood, less tolerance
(perhaps your 1/32") will do nicely.
The suggested 1/8" inch is best combined with a technique of cutting
down the inserted piece where it fits into the dado groove and cutting
the dado less than the thickness of the piece to be inserted. In this
way, you achieve the looser tolerances and still hide the joint seam.