Question

A. Management's Decision-Making Process. 1. The steps are: a. b. c. d. 2. Accounting's contribution to the decision-making process occurs primarily in what steps? B. Incremental Analysis. 1. 2. 3. Incremental analysis sometimes involves changes that might seem contrary to your intuition. For example, sometimes: a. b. Accept an order at a special price. 4. a. b. c. a. 5. Make or buy. In a make or buy decision, the relevant costs are: (1) (2) (3)

Answer 1

Answer 1 There are seven steps in Management Decision Making Process:

1. Identify the decision.

2. Gather relevant info.

3. Identify the alternatives.

4. Weigh the evidence.

5. Choose among the alternatives.

6. Take action.

7. Review your decision.

Accounting's contribution to management's decision-making process occurs primarily in evaluating possible courses of action and in reviewing the results.

Answer 2 Incremental analysis

1. It is a decision making technique in a business wherein two different options are compared by calculating their true costs and choose the alternative course of action

2. It is generally used to take make or buy, rent or lease decisions etc.

3. incremental analysis sometimes involve changes that might seem contrary to intuition for example

a. some time variable cost do not change

b. sometimes fixed cost do not change

4. Accept an order at special price

a. Incremental analysis can be used to decide whether to accept and order at special price or to reject it

b. These special order are generally at lower price then the selling price

c. The final decision to accept or reject the order at special price is based on calculation and consideration of the opportunity cost.

5. Make or Buy

a. In a make or buy decision, relevant cost are

i. Direct Material

ii. Direct Labour

iii. Variable Manufacturing Costs

iv. Fixed Manufacturing Costs, etc.

6. Sell or process further

a. It means whether to sell the product at the current stage only or to process it further.

b. For example after making a yarn is first step, whether to process further to create a cloth from it or not.

c. If the revenue after processing the product is more than the additional cost incurred then decision to further process the product is taken.

d. If the revenue after processing the product is less than the additional cost incurred then decision to sell is taken.

e. Unavoidable cost that are incurred before processing further has no relevance for sell or process further decision

7. Repair, retain or replace equipment

a. In a decision to retain or replace equipment, Management compares incremental cost or savings due to efficiencies provided by the new machines.

b. The relevant items to be considered are

i. Age of equipments

ii. Cost of repairs

c. Any Salvage Value of the existing asset shall also be considered

d. Any Book Value of old asset does not affect the decision, this is sunk cost that can’t be changed by present or future decision.

8. Eliminate an unprofitable segment or product.

a. In deciding whether to eliminate an unprofitable segment or product, the relevant information that are considered are the variable cost, opportunity costs and reduction of fixed costs.

b. In deciding on the future status of an unprofitable segment, Management should consider :

i. which costs and benefits would change as a result of the decision

ii. will there be any affect on the other segment or product due to decision of elimination of segment or product.

9. What is the role of qualitative issues: these are the result of the decisions that can’t be specifically measured. These help to increase the morale of employees, increase in consumer satisfaction, more faith of investors, improved reputation of products, etc.