decision making

Question 1

What are relevant costs?

Answer 1

Future costs that differ between alternatives, such as direct materials and avoidable costs.

Question 2

What are irrelevant costs?

Answer 2

Costs that are the same across alternatives, such as sunk costs and unavoidable fixed costs.

Question 3

What is an avoidable cost?

Answer 3

A cost that can be avoided based on decision-making.

Question 4

What are the steps to framework for decision-making?

Answer 4

1. Define the decision problem. 2. Eliminate irrelevant data. 3. Quantify relevant data.

Question 5

What is the objective when adding or dropping product lines?

Answer 5

To determine if the product contributes positively to operating income.

Question 6

What is the formula for net impact in adding/dropping product lines?

Answer 6

Net Impact = Contribution Margin Lost – Avoidable Fixed Costs.

Question 7

What is the decision rule for make or buy decisions?

Answer 7

Make if Internal Costs < Purchase Price. Buy if Internal Costs > Purchase Price.

Question 8

What are the relevant costs in make or buy decisions?

Answer 8

Make: Direct materials, direct labor, variable overhead. Buy: Supplier price and opportunity costs.

Question 9

What is a special order?

Answer 9

A one-time order not part of normal operations.

Question 10

What is the decision rule for special orders?

Answer 10

Accept if Incremental Revenue > Incremental Costs. Reject if Incremental Revenue < Incremental Costs.

Question 11

What is the profitability index formula? for a constrainded resources problem transfer pricing

Answer 11

Profitability Index = Contribution Margin per unit/ Resource Required per Unit.

Question 12

What is the split-off point in a process?

Answer 12

The point where the cost of manufacturing the product stops before further processing.

Question 13

What is the formula for net advantage from processing further?

Answer 13

Net Advantage = Incremental Revenue from Processing Further – Incremental Processing Costs.

if positive, process further
if negative, sell at the split-off point

Question 14

What is the key takeaway regarding relevant costs?

Answer 14

Eliminate sunk and irrelevant fixed costs from analysis.

Question 15

How is contribution margin used?

Answer 15

It is used to ensure alignment with profit maximization.

Question 16

What should be considered for qualitative factors in decision-making?

Answer 16

Impacts on morale, reputation, and customer relationships.

Question 17

What factors should be considered in a make-or-buy decision?

Answer 17

Internal costs, purchase price, and opportunity costs.

Question 18

What is the primary goal when utilizing constrained resources?

Answer 18

Maximize profit with resources such as machine hours.

Question 19

What are sunk costs?

Answer 19

Costs that cannot be recovered and should not affect decisions.

Question 20

What are the advantages of selling at the split-off point?

Answer 20

Avoids additional processing costs and risks.

Question 21

What is the formula for processing further?

Answer 21

Process further if Incremental Revenue > Incremental Costs.

Question 22

What are the challenges at the split-off point?

Answer 22

Determining accurate costs and revenues for decision-making.

Question 23

What is the key focus in decision-making scenarios?

Answer 23

Focus on costs and revenues that change between alternatives.

Question 24

What exam question can you expect on decision scenarios?

Answer 24

How do you distinguish between relevant and irrelevant costs?

Question 25

What exam question can you expect on qualitative factors?

Answer 25

What qualitative factors influence decision-making?

Question 26

what are the common decision making decisions

Answer 26

1. adding or dropping product lines
   2.make or buy
   3.special orders
   4.sell or processing
   5.utilizing constrainted resources

Question 27

formula for adding or dropping product lines

Answer 27

net impact = contribution margin lost - avoidable fixed costs

Question 28

make or buy decisions come down to

Answer 28

compare per unit direct materials, direct labor and variable overhead (if we make it) and unit price from supplier

Question 29

special orders deicision rule

Answer 29

accept if incremental revenue>incremental costs

reject if incremental revenue<incremental costs

Question 30

sell or process further decision rule

Answer 30

b. Key Rule:
i. Process further if
1) IncrementalRevenue>IncrementalCosts
ii. Sell as if
1) IncrementalRevenue<IncrementalCostsIncrementalRevenue<IncrementalCosts.

Question 31

utilzing constrainted resources decision rule

Answer 31

i. Prioritize products with the highest index.

Question 32

utilizing constrainted resources formula

Answer 32

1) Profitability Index= Contribution Margin / Resource Required per Unit​.