Download Decision Making

Decision-Making
Session Summary (1)
learning objectives
the scope of decision-making
the seven steps of the decision-making process
relevant costs
examples of practical areas of decision-making
marginal costing and shutdown or continuation decisions
Session Summary (2)
make versus buy
product mix decisions and limiting factors
sales pricing
profit volume (PV) chart and contribution curve
profit volume (PV) chart and contribution curve band
decision trees
example of a decision tree
Learning Objectives (1)
explain the scope and importance of decision-making
to an organisation
outline the decision-making process
explain the significance of the concept of relevant costs
apply marginal costing techniques to decision-making
Learning Objectives (2)
evaluate shut-down or continuation decisions
critically compare make or buy alternatives
consider the problem of product mix, scarce resources
and limiting factors
consider the wide range of sales pricing options
use a decision tree to determine expected values of
alternative outcomes
The Scope of Decision-Making
The Seven Steps of the
Decision-Making Process
Relevant Costs (1)
the decision-making process includes identification of
relevant costs, and starts with the identification of
objectives
following the implementation of decisions, the process
ends with the comparison of actual results with expected
outcomes
relevant costs, or incremental or differential costs, arise as
direct consequence of a decision, which may differ
between alternative options
Relevant Costs (2)
Costs that are generally relevant
materials costs
differential costs
opportunity costs
variable costs
Relevant Costs (3)
Costs that are generally not relevant
capital expenditure already made or committed
fixed costs
depreciation
sunk costs
committed costs
notional costs
Examples of Practical Areas of
Decision-Making
Marginal Costing and Shut-down
or Continuation Decisions
marginal costing may be used to assist in shutdown or
continuation decisions
a shut-down decision that is based on absorption costing
may not be a good decision if a contribution is being
made towards covering fixed costs
Make versus Buy
make versus buy decisions involve consideration of a
wider range of factors than simply the differences in the
basic cost, for example:
cost price sensitivity
accuracy of data
reliability of bought-in materials
supplier switching costs
delivery reliability
financial stability
cost price stability
opportunity costs
Product Mix Decisions and
Limiting Factors (1)
organisations do not have access to unlimited supplies of
resources, for example
labour hours
levels of labour skills
machine capacity
time
market demand
components and raw materials
cash
Product Mix Decisions and
Limiting Factors (2)
a limiting factor is the lack of any resource which limits
the activity of the organisation
product mix decisions are influenced by the scarcity of
resources and the availability of limiting factors
Sales Pricing (1)
sales pricing policy is just one of the four categories of
decision included in the marketing mix of
price
product
place
promotion
Sales Pricing (2)
there is a variety of methods that may be used to
determine selling prices, which may be included under the
general headings of:
cost plus pricing
pricing based on demand and using market data
sales pricing policy is based on cost and market factors
that influence demand for the product
Profit Volume (PV) Chart and
Contribution Curve
Profit Volume (PV) Chart and
Contribution Curve Band
Decision Trees
decision trees enable a sequence of interrelated decisions,
and their expected outcomes, to be reported pictorially
Example of a Decision Tree