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CH 14 - CHAPTER 14 DECISION MAKING RELEVANT COSTS AND...

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CHAPTER 14 - DECISION MAKING: RELEVANT COSTS AND BENEFITS THE DECISION-MAKING PROCESS The decision process consists of the six steps that follow. In addition to serving in an advisory capacity and being a provider of relevant information, the managerial accountant is often a member of a cross-functional, decision-making team. Clarify the decision problem. Specify the criterion upon which the decision will be made. Identify the alternatives. Develop a decision model that brings together the criterion, the constraints, and the alternatives. Collect the data. Select an alternative. Although the managerial accountant collects and presents quantitative information, the role of qualitative information should not be underestimated. A skilled manager evaluates qualitative factors, such as employee morale, that do not fit easily into numerical decision models. Information that is useful in decision making must be relevant (pertinent to the decision problem); accurate (precise); and timely (arrive in time for the decision to be made). Companies will occasionally trade off accuracy for timeliness (e.g., conduct a local marketing test for a new product rather than a more extensive test on a national basis). RELEVANT INFORMATION The information gathered should be relevant to the opportunity or problem at hand. Relevant information involves costs and benefits that (1) differ among the alternatives being considered and (2) are future oriented. Both guidelines must be met. Sunk costs are past costs that have already been incurred. Such costs are irrelevant in decision making because the amounts cannot be changed by any of the alternatives under review.
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