Opportunity cost Differential cost between the alternatives of producing or not producing surfboard B Every decision involves a choice from among at least two alternatives.
Opportunity cost Differential cost between the alternatives of producing or not producing surfboard B Every decision involves a choice from among at least two alternatives. The costs and benefits of the alternatives should be compared when making the decision.
A relevant cost or benefit is a cost or benefit that differs between alternatives. Differential costs are relevant costs.
Any cost or benefit that does not differ between alternatives is irrelevant and can be ignored in a decision. This is a tremendously powerful concept that allows us to ignore mounds of data when making decisions since most things are not affected by any given decision.
All sunk costs i. All future costs that do not differ between alternatives are irrelevant. Any cost that is avoidable is potentially relevant. An avoidable cost is a cost that can be eliminated in whole or in part as a result of choosing one alternative over another.
When making a decision, eliminate all irrelevant costs. Make the decision based on the remaining, relevant costs. Different costs for different purposes.
Costs that are relevant in one decision situation are not necessarily relevant in another. In each situation the manager must examine the data and isolate the relevant costs. People are especially reluctant to discard sunk costs in decision-making when the sunk costs are a consequence of a past decision that in retrospect was unwise.
People have a tendency to become committed to courses of action that have not worked out. Taking a loss on an asset is an admission of failure. Adding or Dropping a Segment. Decisions relating to dropping old products or segments and adding new products or segments are among the most difficult that a manager makes.
Two basic approaches can be used to analyze data in this type of decision. Compare contribution margins and fixed costs.
A segment should be added only if the increase in total contribution margin is greater than the increase in fixed cost. A segment should be dropped only if the decrease in total contribution margin is less than the decrease in fixed cost. A second approach is to calculate the total net income under each alternative.
The alternative with the highest net income is preferred. Beware of allocated common costs. Allocated common costs can make a segment look unprofitable even though dropping the segment might result in a decrease in overall company net operating income.
Allocated costs that would not be affected by a decision are irrelevant and should be ignored in a decision relating to adding or dropping a segment. The Make or Buy Decision. A make or buy decision is concerned with whether an item should be made internally or purchased from an external supplier.
Advantages of making an item internally.Accounting Tools for Business Decision Making 15th Edition. Author: Paul D Kimmel Financial & Managerial Accounting, 12th + Spreadsheet Success in Accounting, 12th + Spreadsheet: Success Using Excel® 2-Semester Printed Access Card + CengageNOW Printed Access Card 12th Edition College Accounting Chapters with Study Guide and.
Decision Making in Managerial Accounting Essay Words | 11 Pages. need to use accounting information in seeing to it that they are able to plan, evaluate the company performance, manage risks and control the business operations in a manner that is deemed beneficial to the business as a whole (Caplan, n.
d). decision‑making is the focal point of management accounting. The concept of decision‑making is a complex subject with a vast amount of management literature. Gowthorpe () mentioned that management accounting information in turn offers better business decision making allowing consistency in management and control functions within an organization, ensuring professionals plan, organise and control the business.
THE DIFFERENCE BETWEEN MANAGEMENT & FINANCIAL ACCOUNTING: Management accounting is concerned with decision making, cost apportionment, planning and control. It is based within the organisation and is solely for the use of the managers to conduct their business dealings. Principles of business planning and decision making Decision Making is “A commitment to action” (Mintzberg, H., , p.
) ; Management decisions are made for a lot of different reasons, mainly because decision making is a fundamental aspect of the management functions and management decision-making which makes it a key management role.