WK4 (ch17)- AF201

Decision Making

• Management accountant provides relevant info to assist decision-making.

Characteristics of Relevant Information

• Differs between alternatives.

• Relates to the future; past costs (sunk costs) are irrelevant.

• Balances timeliness and accuracy.

Importance of Relevant Information

• Generating information is costly; irrelevance leads to waste.

• Avoids information overload to maintain effective decision-making.

Types of Decisions

• Unique Decisions: Infrequent, require detailed relevant info.

• Repetitive Decisions: Regular or irregular, can use historical data.

Identifying Relevant Costs and Benefits

• Sunk Costs: Past costs, irrelevant for future.

• Opportunity Costs: Benefits forfeited by choosing one alternative.

• Out-of-pocket Costs: Incremental costs of a decision, relevant.

• Avoidable Costs: Future costs that can be avoided, relevant.

• Unavoidable Costs: Costs incurred regardless of decisions, irrelevant.

Considerations for Special Orders

• Evaluate use of spare capacity.

• Consider strategic impacts and qualitative factors.

Make or Buy Decisions

• Analyze avoidable vs. unavoidable costs.

• Consider opportunity costs and quality of suppliers.

Outsourcing Decisions

• Normally long-term, harder to reverse.

Adding or Deleting Products/Services

• Assess changing costs and benefits.

• Consider long-term implications and impact on other areas.

Joint Products Decisions

• Assess costs and benefits of further processing vs. selling.

• Use relative sales value method for allocating joint costs.

Activity-Based Costing

• Provides accurate cost assignments based on cost drivers.

Managerial Incentives

• Managers aim to maximize performance; systems should align with organizational goals.

Pitfalls in Decision Making

• Ignore sunk costs; evaluate fixed cost allocations and opportunity costs.

Key Takeaways

• Relevant information is crucial for sound decision-making and varies with alternatives.