Management's Decision-Making Process and Incremental Analysis

These flashcards cover key concepts related to management's decision-making process and incremental analysis, ensuring a comprehensive review for exam preparation.

What does incremental analysis imply in decision-making?

Incremental analysis is an analysis of the differences between alternatives that will affect a company’s profitability.

What are the steps in the management’s decision-making process?

1. Identify the problem and assign responsibility 2. Determine and evaluate possible courses of action 3. Make a decision 4. Review results of the decision.

How does accounting contribute to the management decision-making process?

In step 2: it provides relevant revenue and cost data; in step 4: it prepares internal reports that review the actual impact of the decision.

What types of information do management consider in business decisions?

Both financial and nonfinancial information. Financial includes revenues and costs; nonfinancial includes employee turnover, environmental impact, and company image.

What is the basic approach used in incremental analysis?

Compare revenues for each alternative, compare costs for each alternative, and analyze net income differences between alternatives.

What are the three important cost concepts used in performing incremental analysis?

1. Relevant costs and revenues 2. Opportunity cost 3. Sunk cost.

What is a special order in terms of decision-making?

A special order occurs when a company receives an offer to make price concessions to a specific customer.

What criteria should be met for a special order to be accepted?

The incremental revenue from the order should exceed the incremental costs.

What factors are considered in make or buy decisions?

The costs incurred in production versus the potential costs of buying the product, often evaluating opportunity costs.

What triggers the decision to eliminate an unprofitable segment?

Management should choose the alternative that results in the highest net income, accounting for the allocation of fixed costs.

What defines a joint product?

Joint products occur when a number of end-products are produced from a single raw material and a common production process.

What is a transfer price?

The price used to record the transfer of goods between two divisions of a company.

What is the importance of budgeting in management's planning?

Budgeting communicates agreed-upon objectives, serves as a performance evaluation basis, promotes efficiency, and deters waste.

What is participative budgeting?

A budgeting approach that invites input from all levels of management, leading to more accurate estimates and perceived fairness.

What is the primary focus of a sales budget?

It represents management’s best estimate of sales revenue for the budget period, derived from the sales forecast.

How is the direct materials budget structured?

It shows both the quantity and cost of direct materials required for production, including purchases adjusted for desired and beginning inventories.