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Unformatted text preview: Introduction to Managerial Accounting Fall 2009Divya Anantharaman Session 10 & 11: November 5 th and November 12 th Short-term decision-making Learning objectives for this session are: • Understand the steps in the decision-making cycle • Understand the key concept of relevant costs • Learn to distinguish between the relevant costs and irrelevant costs in any given situation • Understand the concept of opportunity costs and why they are used in decision-making • Apply concepts of relevant versus irrelevant costs for decision-making in a variety of short-term situations, including but not limited to: o Should the company accept a special order? o Should we make something in-house or buy it from outside? o What products should we make if we face capacity constraints? o Should we accept a new customer / add a new business segment? o Should we drop an existing customer / close a business segment? Required reading: Chapter 11 “Decision-making and relevant information” Homework assignment: Not available through MyAccountingLab Please hand in solutions to the following questions from the textbook: 11-16, 11-20, 11-22, 11-26, 11-42. Decision-making process Managers make short-term, medium-term and long-term business decisions all the time. In any decision, there is a basic decision-making framework that is being (implicitly or explicitly) followed: 1. Define the business goal 2. Identify the alternative courses of action 3. Gather enough information about each alternative; compare the alternatives 4. Choose the alternative that best serves the business goal identified in Step 1 In this session we will focus on Step 3 in this process: how to gather information to compare alternative courses of action; and which information to focus on. In any decision-making situation, we should only focus on relevant costs and relevant revenues. The concept of “relevant costs” and “relevant revenues” There are three important pieces of terminology to learn: • Relevant costs and revenues • Irrelevant costs and revenues • Sunk costs Relevant costs are expected future costs and relevant revenues are expected future revenues that differ between the alternative courses of action that are being considered. In order to be relevant, a cost (or revenue) must: • Occur in the future • Differ among the alternative courses of action Conversely, costs and revenues that are not relevant are said to be irrelevant. Irrelevant costs (or revenues) are those which: • Have already been incurred in the past and cannot be changed regardless of which alternative is chosen,...
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