14_Decision Making

14_Decision Making - Concepts and framework for Managerial...

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Concepts and framework for Managerial Decision Making Mgmt 600
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Decision making Framework Specify the goal (Profit Maximization, Maximize Market Share etc.) Identify Alternatives (options) Identify necessary relevant information to assess alternatives Collect relevant information Quantitative Analysis Qualitative, non financial considerations Decision 2
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Agenda 1. Background – Definitions 1. Costs and cost behavior; classification 2. Contribution margin 3. Relevant information 2. One-Time Only Special Orders 3. Make or Buy Decisions 4. Product Mix Decisions with Capacity Constraints 3
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Direct Cost : A cost that can be traced directly and completely to a specific cost object, in a cost-effective way . A direct cost is traced to a cost object Indirect Cost : A cost that cannot be traced directly and completely to a specific cost object. (Indirect costs are also referred to as Overhead costs.) 4 Classification Based on Traceability to a Cost Object
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5 An example of costs assigned to a cost object:
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Some Basic Cost Terminology Cost – resource(s) sacrificed to achieve a specific objective Cost Object – anything of interest for which a measure of cost is desired Some examples of cost objects Cost Object Example Product BMW X5 SUV Service Dealer-support telephone hotline Project Customer BMW of West Lafayette, a dealer that purchases a broad range of BMW vehicles Activity Setting up production machines Department 6
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For some purposes it is useful to classify costs on the basis of their relationship with a cost driver. 7 Cost Driver A factor whose change “causes” a change in the total amount of a cost – that which “drives” the cost to be incurred, in the first place, or to change, subsequently. Volume of production
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14_Decision Making - Concepts and framework for Managerial...

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