Chapter 11: Decision Making and Relevant Information Flashcards
What are the 5 steps in decision-making?
1. Obtain information
- Make predictions about future costs
- Choose an alternative
- Implement the decision
- Evaluate performance
Bonus: Receive feedback from every step
What are the 2 characteristics of relevant costs and revenues?
What are relevant costs?
What are relevant revenues?
- Occurs in the future
- Differ among alternatives
Relevant costs: expected future costs
Relevant revenues: expected future revenues
What are the key features of relevant information?
- Sunk costs are irrelevant for future decisions
- Compare differences in expected revenues and costs
- Ignore future revenue and costs that is the same
- Managers should consider qualitative & quantitative nonfinancial factors in decision-making
What is opportunity cost?
Contribution to operating income that is given up by choosing another alternative.
What are inventory holding costs?
Funds tied up in inventory that can’t be invested elsewhere.
What are quantitative factors?
Outcomes that can be measured in numerical terms.
What are qualitative factors?
Outcomes that are difficult to quantitatively measure.
What is incremental cost?
Additional total cost incurred for an activity.
What is differential cost?
Difference in total cost between two alternatives.
What is incremental revenue?
The additional total revenue from an activity.
What is differential revenue?
The difference in total revenue between two alternatives.
Name some types of business decisions.
- One-time special orders
- Make (insourcing) vs. Buy (outsourcing)
- Product mix: which products to sell and in what quantities
- Customer profitability: adding or discontinuing product lines or business segments
- Replacing equipment
What is absorption costing?
Determining the cost of inventory using all variable manufacturing costs and all fixed manufacturing costs.
What is the decision that needs to be made when considering one-time-only special orders?
What is the decision rule?
How is the decision made?
Accept when there is idle production capacity and no long-run implications.
Does the special order generate additional operating income?
Yes = Accept
No = Reject
Compare relevant revenues and costs to determine profitability.
What is the decision that needs to be made when considering insourcing vs. outsourcing?
What is the decision rule?
Producing goods or services within or from outside vendors.
The decision rule is to select the option that will provide the firm with the lowest cost and highest profit.
