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Operational Case Study > P1 - Decision Making > Flashcards

P1 - Decision Making Flashcards

1
Q

When making a management decision, what costs should we consider?

A

Only those that are relevant - that are appropriate to the specific management decision

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2
Q

What 3 things classify something as being a relevant cost?

A
  1. Future (NOT SUNK)
  2. Incremental (NOT COMMITTED or ALLOCATED)
  3. Cash Flow (NOT ACCOUNTING)
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3
Q

When is a fixed cost relevant?

A

ONLY if they are avoidable fixed costs, for example in shut down decisions

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4
Q

What is the relevant cost of materials if… they are not currently in inventory?

A

Current purchase price

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5
Q

What is the relevant cost of materials if… they are in inventory but not currently used by the business?

A

Scrap/resale value minus any disposal costs

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6
Q

What is the relevant cost of materials if… they are in inventory and cannot be replaced?

A

Lost contribution plus material cost

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7
Q

What is the relevant cost of materials if… they are in inventory but can be replaced?

A

Current purchase price

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8
Q

What is the relevant cost of labour if… it is not currently at full capacity?

A

Zero

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9
Q

What is the relevant cost of labour if… it is currently at full capacity, and overtime or extra hire is not available?

A

Lost contribution plus labour cost

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10
Q

What is the relevant cost of labour if… it is currently at full capacity, but overtime or extra hire is available?

A

The cost of hiring more staff or paying overtime, whichever is cheaper

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11
Q

What is the relevant cost of a non current asset?

A

The deprival value…

The lower of (the replacement cost) and (the higher of the net realisable value (value if sold) and the economic value in the business)

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12
Q

What is opportunity cost?

A

The relevant cost where an organisation faces a choice over what to do, the opportunity cost is the benefit foregone by choosing one course of action instead of another

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13
Q

What are 3 key differences between relevant costs and accounting concepts?

A
  1. Under the accruals concept, non cash (e.g. depreciation) costs are considered, but other period (future) costs are not
  2. The completeness of relevant information is in terms of the specific decision being made
  3. Going concern concept may not apply - e.g. shut down decisions
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14
Q

What are 3 key strategic, non financial factors to consider when making decisions?

A
  1. Impact on staff
  2. Customer reaction
  3. Availability of resources (cash, skills etc)
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15
Q

What should the minimum price for a one off order be?

A

The total of the relevant costs

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16
Q

What costs need to be considered in a make or buy decision?

A

All avoidable costs

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17
Q

What is the non cost advantage of in-house manufacture?

A

Greater control

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18
Q

What costs need to be considered in a discontinuation decision?

A

All relevant costs and revenues (including fixed costs that will cease if shut down occurs)

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19
Q

What are 3 considerations businesses should make in discontinuation decisions, other than cost?

A
  1. If there are interdependencies between products
  2. Loss of economies of scale or discounts
  3. Impact on staff - redundancies, being ethical
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20
Q

What is a joint product?

A

Joint products are two or more products produced by the same process and separated in processing

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21
Q

What is a by product?

A

Output of some value produced incidentally in manufacturing something else

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22
Q

What 3 things should be considered when deciding whether to further process a joint product?

A
  1. Selling price after further processing
  2. Additional further processing costs
  3. Losses involved in further processing
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23
Q

What 3 elements of research might be taken to aid decision making?

A
  1. Market research (assess demand)
  2. Focus groups (ideals and reactions)
  3. Mystery shopping (assessing competitiors)
24
Q

What is uncertainty?

A

There are a range of future possible outcomes but there is no basis on which probabilities can be estimated (no past experience)

25
Q

What is risk?

A

There are a number of possible outcomes, and past experience allows us to estimate probabilities for each outcome

26
Q

What is stress testing?

A

Looking at how financial projections would be affected by major developments that are hard to quantify, often though modelling or simulation software

27
Q

What are the 3 main uses of stress testing?

A
  1. Seeing how robust the forecast is to changes in inputs
  2. Impact of consequences e.g. cash shortages
  3. Indicating where future action may be required
28
Q

What is simulation?

A

Statistical techniques that simulate potential outcomes where there are multiple uncertain variables, modelling real life behaviour and attaching probabilities to possible outcomes

29
Q

What is the maximax approach?

A

Maximising the maximum achievable profit, regardless of how unlikely it might be

30
Q

Who takes the maximax approach?

A

Risk seekers

31
Q

What is the maximin approach?

A

Maximising the minimum achievable profit - the best possible worst case scenario

32
Q

Who takes the maximin approach?

A

Risk averse investors

33
Q

What is the minimax regret approach?

A

Minimising the maximum regret of making the wrong decision - the smallest opportunity loss from making the wrong decision in a given scenario

34
Q

What is sensitivity analysis?

A

A technique that allows the decision maker to understand better how the assumptions that they have made might affect the final decision

35
Q

What are the 2 main limitations of sensitivity analysis?

A
  1. Only one variable at a time can be analysed

2. Difficult to use for decision making if no probabilities of changes are known

36
Q

Who would use expected values to make a decision?

A

Risk neutral decision makers

37
Q

What is the expected value?

A

A weighted average calculated, based on historical outcomes and their probabilities

38
Q

What are the 3 main limitations of expected value?

A
  1. They are not relevant to one off decisions (long run average)
  2. Ignores the spread of possible returns (risk)
  3. Relies on accuracy of probabilities
39
Q

What are one (two) way data tables useful for?

A

Making decisions where there is 1 (2) uncertain variables

40
Q

What is a payoff table?

A

A table that matches two inter-related data, often the demand and supply for a product, used to determine what is the best quantity to supply

41
Q

What is the value of perfect information?

A

How much would be paid to give the perfect information about future probability states

42
Q

What is the equation for the value of perfect information?

A

EV (with perfect info) - EV (without perfect info)

43
Q

What is a decision tree?

A

A pictorial method of showing a sequence of interrelated decisions and their expected outcomes

44
Q

How do we read a decision tree?

A

From right to left

45
Q

What is the standard deviation?

A

A statistical measure of volatility, showing how widely values range from the average value - good indication of overall risk

46
Q

Why might a company use a cost plus approach when pricing their product?

A

Price/demand relationships can be difficult to identify, so using manufacturing costs is easier

47
Q

In what situation would we use marginal cost as a basis for cost plus pricing?

A

Useful as a minimum price for a one off order where there is spare capacity

48
Q

What is the risk of using marginal cost as a basis for cost plus pricing?

A

Fixed costs are ignored

49
Q

In what situation would we use relevant cost as a basis for cost plus pricing?

A

Useful as a minimum price where there are scarce resources as it incorporates opportunity costs

50
Q

What are the 2 benefits of using full absorption cost as a basis for cost plus pricing?

A
  1. Assuming budgeted demand is achieved, this guarantees all costs are covered in both the short and long term
  2. Cheap and quick method of setting prices
51
Q

What 2 things must be considered when using full absorption cost as a basis for cost plus pricing?

A
  1. Absorption method is fair

2. Customers are happy to pay the price set

52
Q

What are the 2 benefits of using standard cost as a basis for cost plus pricing?

A
  1. Price can be set stable at the beginning of the period

2. Any internal inefficiency is borne by the business

53
Q

What external factor should be considered when setting prices?

A

What customers are willing to pay

54
Q

What is the main benefit of any cost plus pricing method?

A

Simple and easy to implement

55
Q

What is the difference between adding a markup and setting a margin?

A

Markup is added as a % of cost to achieve the final price, whereas when applying a margin the profit made is set at a percentage of the price

56
Q

What are 3 key impacts of using big data to determine product mix?

A
  1. More transparent and accessible data to determine what customers want and predict behaviour
  2. More potential for customer segmentation and targeting
  3. Better ideas of non financial performance for long term direction and earlier corrective action
57
Q

What are 3 main areas of big data likely to influence future product mix decisions?

A
  1. Changes in customer preferences
  2. Impact of seasonal fluctuations
  3. Competitor strategies

Operational Case Study (10 decks)

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