M/A- Relevant Information for Short Term Decision Flashcards
What is the four-step process for decision-making?
- Identify the problem
- Evaluate possible courses of action
- Make a decision
- Review result
How do managers make decisions?
Short term decision
-This is for temporary situations or immediate action
Long term decision
- For more permanent situations and attempt to meet strategic goals
Ex. For special orders, in the short term, need to consider capacity because it only has so many labor hours, machine hours, direct material
Why is decision making step 2 & 4 very important
- Management accountant - data that is used helps provide an effective course of action to use and can prepare internal reports to determine what effective to solve a problem
What are the different types of relevant information
- Consider the quantitative and qualitative factors that differ between alternative
- Relevant revenue - can be gain or loss from the decision
- Variable cost - cost that can be avoided (DM, DL, VOH)
- Fixed cost - can be avoided (salaries, rent, labour cost)
- Opportunity cost - Benefits that are forgone from the decision
Differential income - Difference in income from two alternative
What are some of the issues with relevant costing
- Relevant costing - can be misleading and may include need to use level of professional skepticism when determining data of relevant cost
What are some examples of relevant cost application
- Whether to sell a product at split off or process it further
- Whether to accept a one-time special order
- Whether to add or drop a department
- Whether to make or buy a component
- How to allocate a constraint resource
What are the qualitative and quantitative factor to deciding for a special order
Quant: Need to determine if a company has excess capacity, relevant costing, pricing
Qual: Consider before accepting, the short-term and long-term impact on regular price because customers will like to have the price lower
-Loss of customer to fulfill social order
Provide the three-step process for the special order for making a decision
- Is there excess capacity? No - Do not accept
Yes - Move to step 2 - Does incremental revenue cover incremental costs? No - Do not accept special order
Yes - Move to step 3 - Do qualitative considerations support accepting orders? No - Do not accept
Yes - Proceed with special order
What is needed to consider for adding or dropping a product, service, or department
- Have to determine if it is profitable. What is the impact of the organization for net income, sales & costing
What is the Quantitative and Qualitative consideration
Quant : overall impact on the organization’s net income.
If products are complementary, if one is dropped, users’ decision to add or drop the original product would be part quant.
Qual: Impact on employee morale due to jobs
- Capacity issues if a new line is added to existing, fully utilized space
- Impact on organization’s reputation because of decision to drop the product
- Loss of customer who purchase more than one product and now will go to another supplier
Factor: Impact on product sales, layoffs, Reputation
What are the steps for deciding to add or drop a product
Add:
1. Does it have excess capacity? No - do not add
Yes - Move to step 2
2. Are incremental revenue from adding products greater than incremental cost? No - do not add product
Yes - Move to Step 3
3. Do qualitative considerations support adding products? No - do not add product
Yes - Add product
Dropping
1. Are incremental costs saved from dropping products greater than incremental revenue lost? No - Do not drop
Yes - Move to step 2
- Do qualitative considerations support dropping the product? No - Do not drop the product
Yes - Drop product
What is to be considered for an outsourcing decision
- Need to consider the organization’s intermediate goods/ services or purchase it from an outside supplier
- Organization has sufficient capacity expertise, reliable supply of material and labor, reasonable the cost being the same
- Product or service being outsourced is not a core competency of the organization
- There is a lack of supply of the necessary raw material and or labor
What is the quantitative and qualitative factors that should be considered
- Decrease in quality - an organization can no longer control some aspects of quality
- Unforeseen future expenses - unplanned expenses, shipping cost, foreign exchange
- Reliability - outsourcing organization relying on another part to deliver
- Reputational risk - Any organization that uses outsourcing organization faces the risk of reputation
- Reliance on a single supplier - The manufacturing process is specialized, and the organization may be reliant on a single outsourcing organization, which limits its choice and ability to control
- Miscommunication - Any time a product is outsourced, there is potential for communication issues
What are some alternatives for outsourcing
- Offshoring - Relocation of part of business for one country cheap labour, moving support, accounting
- Contracting - Involving obtaining services of an individual to perform a specific task, is generally a task that cannot be performed internally
Explain the decision for the utilization of capacity
- For the utilization of capacity constraint - constraint resources are the factor if the company can meet demand due to capacity limit, production level, machine labor efficiency
- Problems with the constraint resources can be solved in the long run by modifying and redesigning the product and or production process
