Decision_Making_with_Relevant_Costs_and_Strategic_Analysis_A_Few_...

Decision_Making_with_Relevant_Costs_and_Strategic_Analysis_A_Few_...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Decision Making with Relevant Costs and Strategic Analysis: A Few Insights When you complete your study of material in this section, you should be able to: •. Explain and illustrate the following terms: - book value - differential cost - incremental cost - opportunity cost - outlay costs (out-of-pocket costs) - relevant costs (or relevant revenues) - sunk costs Consider the strategic issues that are part of the decision context. Analyze the relevant costs in a special order decision. •. Analyze the relevant costs in a make, lease or buy decision. Sell before or after additional processing. Keep or Drop a product line. •. Determine the most profitable product (products) to produce given scarce resources. •. Explain why costs that are not relevant in the short run may be important in the longer term. Decision Making Process First, what are the strategic issues surrounding the decision? Is the short-term impact aligned with our long-term strategy? Second, what criteria have been specified by management to guide the decision process? Third, have a relevant and strategic cost analysis been conducted? Fourth, have we selected and implemented the BEST course of action?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Page 2 Fifth, do we have an evaluation plan in place? Relevance, Costs, and the Decision Process Firms are trying to allocate limited resources. - Money is not the only limited resource - Management time and talent are often problem areas. This may be the most critical resource in many situations. Accounting information helps us understand the consequences of various allocation decisions. It helps us answer questions such as: - Am I going to make more or less than before? - Which costs are likely to change if I do this? Financial accounting data does not, by itself, provide enough information to make the decision. Information related to a decision is relevant. Other information does not matter for a particular decision. What information is relevant depends on the decision. - A decision to buy a new machine requires different information than a decision to outsource production of the product. - A decision to attend a public school like North Texas versus a private school like Wesleyan is influenced by not only tuition and fees but also convenience and faculty accessibility (class size).
Background image of page 2
Page 3 - A decision to take financial or managerial accounting is not influenced by the fees. They are the same. It is influenced by the subject matter, the prerequisites, your interests, and requirements. Relevant Costs for Management Decisions Almost all problems in this area will contain some irrelevant information. But this is not unusual because in real life managers are bombarded with a large amount of irrelevant information. You must act as a "data filter," sifting through the information to determine what should be included and what can be excluded. The first step is to identify the relevant costs:
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/13/2010 for the course FNS AC07 taught by Professor Archie during the Three '10 term at Australian National University.

Page1 / 16

Decision_Making_with_Relevant_Costs_and_Strategic_Analysis_A_Few_...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online