Chapter 11: Decision making with a strategic emphasis Flashcards
(18 cards)
What are the five steps of decision making?
- Consider organization’s business environment and competitive strategy
- Specify criteria by which decision is to be made and identify alternative actions
- Analyze decision-relevant information that is developed, using relevant cost and strategic analyses.
- Select best decision alternative based on relevant cost analysis and strategic analysis, and implement it
- Evaluate performance of implemented decision as basis for feedback for possible reconsideration of this decision as it relates to future decisions.
What are relevant costs?
future cost that differs between and among decision alternatives; an avoidable cost
What are sunk costs?
costs that have been incurred in the past or committed for future and are therefore irrelevant for decision-making
What are the two criteria for costs to be relevant?
Criteria for costs to be relevant:
- Must be in the future
- Must be differential in terms of decision alternatives
Depreciation is only a relevant cost when tax effects are considered, as depreciation reduces taxable income and thus tax expenses.
What is opportunity cost?
benefit lost when choosing one option precludes receiving the benefits from an alternative option. Theses are always relevant and therefore should be included in the decision-making process.
What is a special-order decision?
Firm has a one-time opportunity to sell a specified quantity of its product or service.
What are the three groups of cost elements in special-order decisions?
- Unit-level costs
- Batch-level costs
- Facility-level costs
What is a make-vs.-buy decision?
Decision of firms to make components inhouse or buy it from outside suppliers.
What is a value stream?
group of related products. Useful for preparing profitability reports as part of lean accounting. All the activities required to create customer value for a family of products or services.
What is a lease-vs.-purchase decision?
decisions regarding whether equipment should be bought or leased, as leasing arrangements have become more favorable.
What is the decision to sell before or after additional processing?
Decision of firms to sell products / services before an intermediate processing step or do you add another processing step and sell the product for a higher price.
What are joint production processes?
process yielding multiple outputs from a common resource
Separable processing costs?
costs incurred after split-off point traceable to individual products in a joint production process.
What is the split-off point?
point in joint production process where products with individual identities emerge
What are joint production costs?
costs incurred prior to split-off point
What is a product- line profitability analysis?
Keeping or dropping a product line. Points to be addressed:
- Most profitable products
- Proper pricing of products
- Products requiring most aggressive promotion and advertisement
- Rewards for managers.
What is the guideline in production processes with one production constraint and execess demand?
focus production and sales on product with highest contribution per unit of scarce resource.
Name three implementation issues in relevant cost analysis?
- Predatory pricing: exists when company has set prices below average variable costs and raises them later to recover losses from lower prices.
- Replacement of variable costs with fixed costs: E.g., a new machine is bought which significantly increases fixed costs but reduces direct labor costs. Distorts relevant cost analysis
- Proper identification of relevant factors
