decision making Flashcards
What are relevant costs?
Future costs that differ between alternatives, such as direct materials and avoidable costs.
What are irrelevant costs?
Costs that are the same across alternatives, such as sunk costs and unavoidable fixed costs.
What is an avoidable cost?
A cost that can be avoided based on decision-making.
What are the steps to framework for decision-making?
- Define the decision problem. 2. Eliminate irrelevant data. 3. Quantify relevant data.
What is the objective when adding or dropping product lines?
To determine if the product contributes positively to operating income.
What is the formula for net impact in adding/dropping product lines?
Net Impact = Contribution Margin Lost – Avoidable Fixed Costs.
What is the decision rule for make or buy decisions?
Make if Internal Costs < Purchase Price. Buy if Internal Costs > Purchase Price.
What are the relevant costs in make or buy decisions?
Make: Direct materials, direct labor, variable overhead. Buy: Supplier price and opportunity costs.
What is a special order?
A one-time order not part of normal operations.
What is the decision rule for special orders?
Accept if Incremental Revenue > Incremental Costs. Reject if Incremental Revenue < Incremental Costs.
What is the profitability index formula? for a constrainded resources problem transfer pricing
Profitability Index = Contribution Margin per unit/ Resource Required per Unit.
What is the split-off point in a process?
The point where the cost of manufacturing the product stops before further processing.
What is the formula for net advantage from processing further?
Net Advantage = Incremental Revenue from Processing Further – Incremental Processing Costs.
if positive, process further
if negative, sell at the split-off point
What is the key takeaway regarding relevant costs?
Eliminate sunk and irrelevant fixed costs from analysis.
How is contribution margin used?
It is used to ensure alignment with profit maximization.
In decision-making, beyond numbers and financial data, what qualitative factors should be considered that can impact a business in the long run?
Employee morale – How decisions affect motivation and workplace culture
• Company reputation – The public perception and brand image implications
• Customer relationships – The impact on loyalty, trust, and satisfaction
What factors should be considered in a make-or-buy decision?
Internal costs, purchase price, and opportunity costs.
What is the primary goal when utilizing constrained resources? MA ch 11a
Maximize profit with resources such as machine hours.
What are sunk costs?
Costs that cannot be recovered and should not affect decisions.
What are the advantages of selling at the split-off point?
Avoids additional processing costs and risks.
What is the formula for processing further?
Process further if Incremental Revenue > Incremental Costs.
What are the challenges at the split-off point?
Determining accurate costs and revenues for decision-making.
What is the key focus in decision-making scenarios?
Focus on costs and revenues that change between alternatives.
What exam question can you expect on decision scenarios?
How do you distinguish between relevant and irrelevant costs?
What exam question can you expect on qualitative factors?
What qualitative factors influence decision-making?
what are the common decision making decisions
- adding or dropping product lines
2.make or buy
3.special orders
4.sell or processing
5.utilizing constrainted resources
formula for adding or dropping product lines
net impact = contribution margin lost - avoidable fixed costs
make or buy decisions come down to
compare per unit direct materials, direct labor and variable overhead (if we make it) and unit price from supplier
special orders deicision rule
accept if incremental revenue>incremental costs
reject if incremental revenue<incremental costs
sell or process further decision rule
b. Key Rule:
i. Process further if
1) IncrementalRevenue>IncrementalCosts
ii. Sell as if
1) IncrementalRevenue<IncrementalCostsIncrementalRevenue<IncrementalCosts.
utilzing constrainted resources decision rule
i. Prioritize products with the highest index.
utilizing constrainted resources formula
1) Profitability Index= Contribution Margin / Resource Required per Unit.
