Short term decision making Flashcards
when are short term decisions made?
business continually make short term decisions, they involve the day to day, operational, running of the business
e..g should we change prices this year?
what is important in short term decision making?
to only consider relevant factors (relevant costs)
what is meant by relevant costs?
STD will not have an effect on ALL types of costs that an organisation incurs, some costs are just set and can’t be changed without making long term decisions
decision making process should only include costs that will change as a result of the decision
what is revenue expenditure>
day to day costs
how is revenue expenditure split tin terms of classification?
- functional
= direct
= indirect (overheads) - behaviour
= variable
= fixed
other than classifying costs by direct and indirect how else can costs be classified?
by behaviour
what are ways to measure activity levels?
- volume of production in a period
- number of items sold in a period
what are variable costs?
costs that change in direct proportion to level of activity
i.e raw materials) - increase no. of units increases the costs
(labour costs
(sales commission)
what are fixed costs?
costs remain the unchanged / unaffected by changes in activity
changes occur due to management decision
(cut back on warehouses, more long terms costs
salary of directors, rent)
what is contribution analysis?
tool managers use for STD
look at whether each product made/used makes a contribution (if there is then it is worth making)
- if FC are covered : any excess = profit
- enables business to choose most profitable good / services to produce in the short term
what happens with fixed costs in the short term?
- irrelevant o many STD
- stay the same in the short term
- only if extra fixed costs are incurred do they become relevant e.g. rent on new building to create new products
what are the contribution calculations you will need?
- contribution per unit
- total contribution
- contribution margin
how do you do contribution per unit?
sale price - variables
hw do you do total contribution?
cost per unit x no. of units sold
how do you do contribution margin?
(total contribution / total revenue) x 100
percentage
what does contribution tell you?
if cont > FC = profit
cont < FC = loss
cont = FC = break even
what is CVP?
cost volume profit
e.g. if you changed costs how would that affect profit and volume
once selling price and costs structure has been made it is possible to manipulate data to provide info for management decision
what would dhapne if price went up by 10%?
play around with the costs of a company
what are other short term decision making tools?
- break even point
- target profit
- margin of safety
what is break even point?
- profit = 0
- the point in which business makes neither a profit or loss
- sales are sufficient to pay total costs
how do you work out break even point?
number of units
= total FC / (cont / unit)
what is target point?
how many units do e need to sell to achieve target level of profitability?
units = fixed costs + target price / cont per unit
what is margin of safety?
how much is sold over and above the break even point?
- percentage or in unites
how do you work our the margin of safety/
percentage =
actual units sold - break even units / actual units sold x 100
units =
actual units sold - break even units
what is contribution?
sales revenue that does go towards variables and so is used to cover fixed costs, anything left over is profit
- shows that maximising sales of one product may have higher contribution than another due to pricing
how can contribution be used?
widespread utility:
- product range/mix/closure
- special orders
- decision making with scarcity
- mutually exclusive decisions (make or buy)
how is contribution analysis used for product range descsions?
- which products should we make?
- products making a positive contribution (i.e selling price > variable cost)
-
how can contribution be applied to closure of dept/product?
over time management must cintiutally appraise the viability of specific products it offers and departments it operates
apply contirbution methodology to reach viability decision
why are qualitative factors important in decision making?
- highly influential in decision making process
- reverse decisions / conflicts, fincinaial data says reject decision but it is accepted for qualitative reasons (rural transport)
- customers (demand/loyalty/inclusion/of a product)
- employees (trade union reposes/motivational impact)
- competitors (realisation)
- legal constraints (health and safety)
- suppliers (quality/promptness/credit facilities/ after sales service)
