AMA Q22 - Chapter 11 Flashcards
What is the one factor that should be considered when making short-term decisions in business?
Contribution. Direct Costs and Revenue variables
What is the timeframe for short-term decision making?
less than one year
Three characteristics of Relevant Costs
- Future - The cost will be incurred in the future
- Incremental - dependent on a decision being made
- Cash Flow - The cost should affect additional cash spending to the business
Opportunity cost
A saving in contribution when the path of least destruction is chosen. Least damage done.
Define Relevant Cost
Any cost that is applicable to a specific management decision
Market Share Constraint
Customer demand places a limit on the maximum volume of sales units
Examples of a scarce resource
- Materials available to purchase
- Labour hours available
- Machine hours available
- Plant capacity
Optimal Production Plan
The most profitable combination of products
How to Calculate the Optimal Production Plan
- Identify the limiting factor
- Calculate contribution per unit
- Calculate contribution per unit per limiting factor
- rank the products
Sunk cost
A cost that has taken place and has no correlation to the decision in question
Committed cost
A cost that has been previously committed to. It has no link to the decision being made
Most common example of an opportunity cost?
A decision to choose one product over another due to limited resource
