Ch19: information for decisions: relevant costs and benefits

Question 1

What is the role of management accounts for decision making?

Answer 1

• tactical decisions - do not require significant capacity related resource commitments
• long term decisions - more strategic, increase or decrease in capacity related resources, more difficult to reverse, more enduring effects.

Question 2

What should be considered when assessing usefulness of product costing data?

Answer 2

• includes sunk costs which should be ignored
• unitised fixed costs should be ignored - focus on avoidable or incremental costs
• opportunity costs are not recorded

Question 3

What is the criteria for determining if information is relevant?

Answer 3

• different under competing courses of action - costs and benefits that are the same across available courses of action need not be considered
• relates to the future - sunk costs are ignored

Question 4

What should be considered to evaluate a special order?

Answer 4

Capacity to accept order is important. With spare capacity if incremental revenue is greater than incremental costs then should be accepted.

With no spare capacity - factor in opportunity costs.
Can increase capacity in terms of labour/overheads.
Long term considerations - business reputation, customer service etc.

Question 5

What should be considered to evaluate making or buying a product?

Answer 5

Consider avoidable vs unavoidable costs. Opportunity costs are relevant.

Quality - should be equal or better than internally made product if bought
Reliability - on time delivery
Layoffs - outsourcing may create labour problems
Technical capabilities, labour relations and financial stability of the supplier.
Supplier confidentiality.

Question 6

What should be the focus when deciding to add or delete a product, service or department?

Answer 6

Incremental costs and revenues.

How will the decision impact in a broader strategic sense.

Question 7

How to decided whether to sell at split off or process further?

Answer 7

Process further when incremental gain is greater than incremental costs.

Question 8

What value does ABC have for making decisions?

Answer 8

abc leads to identification of precise cost implications of various decision alternatives.

Question 9

What is the main characteristic of a tactical decision?

Answer 9

Does not require significant commitment of resources. Can be changed or reversed quickly.