Chapter 7: Decision-Making Process

Steps of the Decision-Making Process:

1. Identify the Problem/Decision: Recognize the need for a decision.

2. Gather Information: Collect relevant data and information.

3. Identify Alternatives: Brainstorm possible solutions or choices.

4. Evaluate Alternatives: Analyze each alternative's costs, benefits, and risks.

5. Make a Decision: Select the best alternative based on analysis.

6. Implement the Decision: Put the chosen alternative into action.

7. Evaluate the Decision: Assess the outcomes and adjust if necessary.

Relevant vs. Irrelevant Costs and Benefits:

• Relevant Costs/Benefits: Those that change as a result of a decision and influence the choice among alternatives.

  • Example: For a special-order decision with excess capacity, relevant costs might include direct materials, direct labor, and variable overhead.

• Irrelevant Costs/Benefits: Those that remain constant regardless of the decision and don't impact the choice among alternatives.

  • Example: Sunk costs like past advertising expenses are irrelevant for a special-order decision without excess capacity.

Identifying Relevant vs. Irrelevant Costs and Benefits for Specific Decisions:

1. Special-Order Decision with Excess Capacity:

   • Relevant: Variable production costs for the special order.

   • Irrelevant: Fixed overhead costs.

2. Special-Order Decision without Excess Capacity:

   • Relevant: Opportunity cost of lost regular sales.

   • Irrelevant: Fixed manufacturing costs.

3. Make-or-Buy Decision:

   • Relevant: Cost of producing internally vs. purchasing externally.

   • Irrelevant: Sunk costs related to internal production facilities.

4. Keep-or-Drop Decision:

   • Relevant: Contribution margin of the product.

   • Irrelevant: Historical costs of equipment used to produce the product.

5. Sell-or-Process Further Decision:

   • Relevant: Additional revenue from further processing.

   • Irrelevant: Costs incurred prior to the split-off point.

Prioritizing Products to Maximize Short-Term Profit with Constrained Resources:

• Rank products based on contribution margin per unit of constrained resource (e.g., machine hours, raw materials).

Chapter 8: Planning and Control Cycle

The Planning and Control Cycle:

1. Establish Objectives and Formulate Plans

2. Implement Plans

3. Monitor Performance

4. Compare Actual Performance with Planned Performance

5. Take Corrective Action

Sequence of Individual Budgets in Master Budget Preparation:

1. Sales Budget

2. Production Budget

3. Direct Materials Purchases Budget

4. Direct Labor Budget

5. Manufacturing Overhead Budget

6. Selling and Administrative Expenses Budget

7. Cash Budget

8. Budgeted Income Statement

9. Budgeted Balance Sheet

Benefits of Budgeting:

• Provides a roadmap for achieving organizational goals.

• Enhances coordination and communication among departments.

• Helps in resource allocation and control.

• Facilitates performance evaluation and accountability.

Components of Operating and Financial Budgets:

• Operating Budgets: Include budgets related to sales, production, and operating expenses.

• Financial Budgets: Include budgets related to cash, capital expenditures, and financing activities.

Behavioral Problems of Budgets and Solutions:

• Problems: Budgetary slack, gaming, resistance to change.

• Solutions: Involving employees in the budgeting process, providing incentives for accurate forecasting, fostering a culture of transparency and accountability.

Budgets Needed for Preparation:

• Budgeted Cost of Goods Sold: Includes all costs associated with the production of goods sold during a specific period.

• Budgeted Income Statement: Forecasts the company's financial performance over a specified period, showing revenues, expenses, and net income.

• Cash Budget: Predicts cash inflows and outflows to ensure adequate cash availability for operations.

Budgets Used and Not Used in Service/Merchandising Firms:

• Service Firms: May focus more on operating budgets (e.g., sales, production) rather than manufacturing budgets like direct materials or labor.

• Merchandising Firms: May emphasize sales and merchandise purchase budgets, while manufacturing-related budgets are less relevant.