Week 6 - Various Contexts Flashcards
What is a decision model?
A formal method of making a choice and often involves both quantitative and qualitative analyses. Management accountants work with managers by analysing and presenting relevant data to guide decisions.
What are relevant costs and relevant revenues?
Relevant costs are expected future costs and relevant revenues are expected future revenues that differ between the alternative courses of action being considered. Revenues and costs that are not relevant are said to be irrelevant.
For a cost or revenue to be relevant, they must: (2)
- Occur in the future - every decision deals with selecting a course based on its expected future results
- differ between alternative courses of action - costs and revenues that do not differ will not matter
What is a sunk cost?
Aka a past cost - which is irrelevant to decision making.
What is a benefit of using only relevant costs in the decision making process?
Managers can clear away the clutter of potentially confusing, irrelevant data. Focusing on the relevant data is especially helpful when all the information needed to prepare a detailed income statement is unavailable. Also saves time.
What would be some examples of quantitative relevant information?
- Cost of direct materials, direct manufacturing labour and marketing
- Reduction in development time
- Percentages
Define qualitative factors of relevant information
Outcomes that are difficult to measure accurately in numerical terms. e.g. Employee moral
What is an incremental cost?
The additional total cost incurred for an activity.
What is a differential cost?
The difference in total cost between two alternatives.
What is incremental revenue and differential revenue?
Incremental revenue is the additional total revenue from an activity.
Differential revenue is the difference in total revenue between two alternatives.
What is an opportunity cost?
The contribution to operating profit that is foregone by not using a limited resource in its next best alternative use.
e.g. the cost of studying for a degree is not only the cost of tuition, books, and all that, but also income sacrificed (opportunity cost) by not working. Presumably the estimated future benefits of obtaining a degree (e.g. higher paying job) will exceed these costs.
What is are product mix decisions?
The decisions made by a company about which products to sell and in what quantities.
Why do product mix decisions usually have a short-run focus?
Because the level of capacity can be expanded in the long run.
e.g. BMW must continually adapt the mix of its models of cars to short-run fluctuations in selling prices and demand.
The best product mix enables a company to:
Maximise operating profit, given constraints such as capacity and demand.
Managers should choose products based on what?
Which have the highest contribution margin per unit of the constraining resource.
