Non-Routine Short Term Decision Flashcards
is the process of choosing what to do to achieve an objective.
DECISION MAKING
DECISION MAKING PROCESS
- Describe the Problem
- Evaluate Potential Solutions
- Collect Data
- Evaluate the Option
- Choose an Option
- Take Action
- Evaluate the Impact
Expenses that change due to a specific business decision.
RELEVANT COSTS
Can be added expenses, or removed expenses, depending on the scenario.
RELEVANT COSTS
Are the cost that is affected by the decision that the company/manager takes.
RELEVANT COSTS
Expenses that already exists, regardless of the decision at hand.
IRRELEVANT COSTS
Will not change based on the business decision.
IRRELEVANT COSTS
Are the cost that is NOT affected by the decision that the company/manager takes.
IRRELEVANT COSTS
TYPES OF RELEVANT COSTS
- Future Cash Flow
- Avoidable Costs
- Opportunity Costs
- Incremental Costs
TYPES OF IRRELEVANT COSTS
- Sunk Costs
- Committed Costs
- Non-Cash Expense
- General Overheads
cash expense that will be incurred in the future as the result of a decision.
Future Cash Flow
are relevant to a decision that can be avoided if the decision is not implemented.
Avoidable Costs
cash inflow that will be sacrificed as a result of a particular management decision.
Opportunity Costs
total cost incurred due to an additional unit of product being produced.
Incremental Costs
is expenditure which has already been incurred in the past.
Sunk Costs
is a payment obligation that you can’t recover.
Committed Costs
such as depreciation are not relevant because they do not affect the cash flows of the business.
Non-Cash Expenses
are not affected by the decisions under consideration should be ignored.
General Overheads
gastos na hindi direktang naangkop sa produksiyon ng mga produkto o serbisyo ng isang kumpanya
General Overheads Costs
should not be considered because it will be incurred regardless of our decision.
Unavoidable fixed costs
We may sometimes be facing a deal on whether to accept a special order of a particular product. Remember that in cases such as this, the offer should only be accepted if the incremental revenues to be earned are greater than the incremental costs to be incurred or simply if we are going to have an additional profit form the offer, then accept it.
Accept or Reject Special Order
Another non-routine decision that we probably might encounter is whether we have to continue producing a certain item or just have it outsourced. In this situation, we need to see which option would minimize costs more.
Make or Buy
Sometimes, we may have to deal with underperforming segments. We monitor their performance, we do necessary corrective actions, but still they produce losses for company. But just because they incur losses does not always mean that we have to drop them immediately. We have to take a look at its performance more closely. When we are face with a decision to see if we should drop a non-performing segment, we have to know if we will be better off without it or not.
Drop or Retain a Segment
Another situation that we might encounter is the decision to either sell a product as is or have it processed further. Of course, higher sales will be earned from a product if it is processed further. But we have to consider also the costs of processing it further. Given that, if the incremental revenue to be earned from the product is greater than the incremental costs of producing it, then we should process it further.
Sell as is or Process Further
Sometimes we are faced with a good problem. For example, the demand for our products is so high that we have to allocate our resources to such products. When faced with such cases, we must prioritize that product that generates the highest contribution margin per unit of scarce resource that we are allocating.
Limited Resources
5 COSTS in DECISION MAKING
- Make or Buy
- Accept or Reject
- Drop or Retain
- Sell as is or Process Further
- Limited Resources
