Decision Making Flashcards
Relevant Costs
future costs and revenues incremental cash flows
Non Relevant Costs
sunk costs committed costs non cash flow costs i.e. depreciation, NBVs
Opportunity Cost
The best alternative that is forgone in taking the decision
Relevant Costs of Materials
Relevant Cost of Labour
Relevant Cost of Non Current Assets
Limiting Factor
is any factor which is in scare supply and stops the organisation from expanding its activities further
Decisions Involving a Single Limiting Factor
rule stated as:
maximising the contribution per unit of limiting factor
Contribution Per Unit of Limiting Factor Formula
Contribution per unit
/
units of limiting factor required per unit
Optimal Production Plan
1 establish the single limiting factor
2 calc contribution per unit
3 calc contribution per unit of limiting factor
4 rank the products on cont. per unit of limiting factor
5 allocate limiting factor to the highest ranking product
6 Once demand for the highest ranking product is satisified move on to the next highest and so on until scarce resource is used up
Make or Buy Decisions
Spare Capacity
variable cost of internal manufacture
+
any fixed costs directly related to the product
Make or Buy Decisions
No Spare Capacity
variable cost of internal manufacture
+
any fixed costs directly related to product
+
the opportunity cost of internal manufacture i.e. lost contribution from another product
