Podcast
Questions and Answers
When making decisions, managers often categorize the potential results into which two broad categories?
When making decisions, managers often categorize the potential results into which two broad categories?
- Financial and non-financial.
- Relevant and irrelevant.
- Tangible and intangible.
- Quantitative and qualitative. (correct)
Which of the following best describes quantitative factors in decision making?
Which of the following best describes quantitative factors in decision making?
- Outcomes measured in numerical terms, often expressed in monetary units. (correct)
- Considerations of ethical implications and social responsibility.
- Subjective assessments of market trends.
- Outcomes difficult to measure accurately, like employee morale.
What is the primary emphasis of relevant-cost analysis in decision making?
What is the primary emphasis of relevant-cost analysis in decision making?
- Giving greater weight to easily expressed financial factors but never ignoring qualitative factors. (correct)
- Solely focusing on qualitative factors regardless of financial impact.
- Prioritizing long-term strategic considerations over short-term financial gains.
- Balancing qualitative and quantitative factors equally.
In a scenario with limited resources and capacity constraints, what should a company prioritize when determining the product mix?
In a scenario with limited resources and capacity constraints, what should a company prioritize when determining the product mix?
A company identifies that machine hours are a limiting factor in its production process. To optimize the product mix, which calculation is most relevant?
A company identifies that machine hours are a limiting factor in its production process. To optimize the product mix, which calculation is most relevant?
A company is deciding whether to accept a special order at a price lower than its usual selling price. What condition should exist for the order to be considered?
A company is deciding whether to accept a special order at a price lower than its usual selling price. What condition should exist for the order to be considered?
When evaluating a special pricing order, which of the following factors is most critical to consider?
When evaluating a special pricing order, which of the following factors is most critical to consider?
Which of the following best describes outsourcing?
Which of the following best describes outsourcing?
What is another term used to describe outsourcing decisions?
What is another term used to describe outsourcing decisions?
When making short-term decisions, what is the role of variable costs?
When making short-term decisions, what is the role of variable costs?
When making short-term decisions, what is the role of fixed costs?
When making short-term decisions, what is the role of fixed costs?
In incremental analysis, which types of revenues and costs are considered?
In incremental analysis, which types of revenues and costs are considered?
How does the incremental method present data for decision analysis?
How does the incremental method present data for decision analysis?
D&W Company produces doors and windows but has limited machine hours. The following data is available: Doors: Selling price €100, Variable cost €79, Machine time 4 hours. Windows: Selling price €170, Variable cost €132, Machine time 8 hours. Which product should D&W produce first?
D&W Company produces doors and windows but has limited machine hours. The following data is available: Doors: Selling price €100, Variable cost €79, Machine time 4 hours. Windows: Selling price €170, Variable cost €132, Machine time 8 hours. Which product should D&W produce first?
D&W Company has 5,000 machine hours available. Based on the following data, what is the optimal production plan? Doors: Contribution margin €21, Machine time 4 hours, Max sales 100 units. Windows: Contribution margin €38, Machine time 8 hours, Max sales 900 units.
D&W Company has 5,000 machine hours available. Based on the following data, what is the optimal production plan? Doors: Contribution margin €21, Machine time 4 hours, Max sales 100 units. Windows: Contribution margin €38, Machine time 8 hours, Max sales 900 units.
Which of the following is NOT a valid assumption for short-term decisions like special orders?
Which of the following is NOT a valid assumption for short-term decisions like special orders?
D&W Company normally sells doors for €100. A customer offers to buy 500 doors at €85 each. Production costs are: Direct materials €55, Direct labor €18, Variable overheads €6, Direct fixed costs €10, Fixed overheads €5, and Extra selling costs €5 per door. D&W has spare capacity. Using the incremental method, should D&W accept the order?
D&W Company normally sells doors for €100. A customer offers to buy 500 doors at €85 each. Production costs are: Direct materials €55, Direct labor €18, Variable overheads €6, Direct fixed costs €10, Fixed overheads €5, and Extra selling costs €5 per door. D&W has spare capacity. Using the incremental method, should D&W accept the order?
D&W Company makes doors with a per-unit cost of €94, including direct materials (€55), direct labor (€18), variable overhead (€6), direct fixed costs(€10), and fixed overhead (€5). Another company offers to supply doors for €85 per unit. If D&W outsources, it will become spare and the fixed cost will continue to be incurred. What should D&W do?
D&W Company makes doors with a per-unit cost of €94, including direct materials (€55), direct labor (€18), variable overhead (€6), direct fixed costs(€10), and fixed overhead (€5). Another company offers to supply doors for €85 per unit. If D&W outsources, it will become spare and the fixed cost will continue to be incurred. What should D&W do?
A company has limited machine hours and must decide which product to produce. Product A has a higher selling price but requires more machine hours per unit compared to Product B. To maximize profit, the company should prioritize production of which product?
A company has limited machine hours and must decide which product to produce. Product A has a higher selling price but requires more machine hours per unit compared to Product B. To maximize profit, the company should prioritize production of which product?
A company is considering a special order that will utilize currently idle capacity. The order's price is below the normal selling price. Which of the following statements is most accurate regarding the decision?
A company is considering a special order that will utilize currently idle capacity. The order's price is below the normal selling price. Which of the following statements is most accurate regarding the decision?
Which of the following is a crucial management practice when deciding to make-or-buy?
Which of the following is a crucial management practice when deciding to make-or-buy?
A company can sell doors at a price of 85€ or manufacture themselves. What type of factors should be considered in a short-term decision?
A company can sell doors at a price of 85€ or manufacture themselves. What type of factors should be considered in a short-term decision?
A company needs to know how to allocate scarce or restricting factors to produce more effectively. What does it need to identify?
A company needs to know how to allocate scarce or restricting factors to produce more effectively. What does it need to identify?
D&W company has an unlimited labor supply, the machinery operates at full capacity, but raw matarials are scare. In this case, to meke an effective production decision what will be the scare factors?
D&W company has an unlimited labor supply, the machinery operates at full capacity, but raw matarials are scare. In this case, to meke an effective production decision what will be the scare factors?
If the normal selling price will not affacted by an special product, which order factor is acceptable?
If the normal selling price will not affacted by an special product, which order factor is acceptable?
What information could be irrelevant in any decision situations?
What information could be irrelevant in any decision situations?
What would be the final results of no having alternative uses?
What would be the final results of no having alternative uses?
What will be maximized by having a right distribution of Machine Hours?
What will be maximized by having a right distribution of Machine Hours?
A company has two ways to analyze the data in order to make an effective decision. What are they?
A company has two ways to analyze the data in order to make an effective decision. What are they?
What would be the main reason to implement a Special one-time Order only?
What would be the main reason to implement a Special one-time Order only?
What steps should be taken to methodize decision when capacity constrain exist?
What steps should be taken to methodize decision when capacity constrain exist?
Which of the following refers to a resource that restricts output in a production process?
Which of the following refers to a resource that restricts output in a production process?
What does the incremental method consider?
What does the incremental method consider?
For which period are fixed costs unavoidable?
For which period are fixed costs unavoidable?
D&W Company has an unlimited labor supply, machinery is at full capacity, and scare raw materials exist. To maximize profit, what should scare factor be identified?
D&W Company has an unlimited labor supply, machinery is at full capacity, and scare raw materials exist. To maximize profit, what should scare factor be identified?
Which is the best definition concerning relevant cost analysis?
Which is the best definition concerning relevant cost analysis?
What is the crucial management analysis of one-time special order analysis?
What is the crucial management analysis of one-time special order analysis?
A company is deciding whether to purchase raw materials from outside sources. What are the potential decisions called?
A company is deciding whether to purchase raw materials from outside sources. What are the potential decisions called?
What impact will D&W have on profit, by accepting an specific short-term?
What impact will D&W have on profit, by accepting an specific short-term?
To manage the decision making, management needs to answer a particular question. What is the question?
To manage the decision making, management needs to answer a particular question. What is the question?
Why there will be a problem in D&W production ?
Why there will be a problem in D&W production ?
Why is it important for Management to follow a clear process?
Why is it important for Management to follow a clear process?
Flashcards
What are Quantitative factors?
What are Quantitative factors?
Outcomes measured in numerical, monetary terms.
What are Qualitative factors?
What are Qualitative factors?
Outcomes hard to measure numerically, like morale.
What are Limiting factors?
What are Limiting factors?
Resources limiting production; raw mats or machine time.
What is an Optimal Production Plan?
What is an Optimal Production Plan?
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What are Variable costs?
What are Variable costs?
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What is a Special Pricing Decision?
What is a Special Pricing Decision?
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What is the Incremental Method?
What is the Incremental Method?
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What is Outsourcing?
What is Outsourcing?
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What is insourcing?
What is insourcing?
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What are Make-or-buy decisions?
What are Make-or-buy decisions?
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What are Irrelevant costs?
What are Irrelevant costs?
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Study Notes
- Section 5 focuses on costing for decision-making.
- The learning objectives include to;
- Distinguish relevant from irrelevant information
- Explain the importance of qualitative factors
- Know how to choose products to produce with capacity constraints
- How to use the incremental method for decision-making
- Provide recommendations for special pricing and outsourcing decisions.
Relevant Costs for Decision Making
- Managers divide the outcomes of decisions into quantitative and qualitative categories.
- Quantitative factors are measured numerically, expressed in monetary terms like direct material or labor costs.
- Qualitative factors are difficult to measure accurately in numerical terms such as; employee morale.
- Relevant cost analysis emphasizes quantitative factors, qualitative factors are still equally important.
Product-Mix Decisions with Capacity Constraints
- This involves decisions on which products to produce first when resources are limited.
- Identification of the limiting factor (scarce resource) is important.
- Optimal production plans maximize contribution subject to constraints.
- Limiting or scarce factors restrict output, such as scarce raw materials or limited labor supply or machines at full capacity.
- When deciding what "product mix" should be chosen, we must consider how to meet maximum sales demand and maximize contribution per unit of scarce resource.
- Method involved in product-mix decisions when capacity constraints exists;
- Identify the scarce resource
- Calculate the Contribution Margin (CM) for each product (CM = selling price – variable cost per unit)
- Calculate the CM per scarce resource for each product (CM/nb of scarce resources needed)
- Rank; the company should produce the product with the highest CM per scarce resource first
- Optimize production
Short Term Decisions
- Short term decisions include;
- Recap of session 1: Four categories of costs
- Incremental method
- Special pricing decisions
- Outsourcing decisions
- For short term decisions, within the relevant range, variable costs vary in direct proportion to activity while fixed costs remain constant, while;
- Variable costs are relevant
- Fixed costs are irrelevant to decision making.
- Qualitative factors are relevant.
- For long term decisions, beyond the relevant range, fixed costs vary and;
- All costs are relevant
- Qualitative factors are relevant.
Incremental and Differential Method
- When analysing data to make decisions;
- The incremental method considers "All revenues and costs" and has all data.
- The differential method considers only "Relevant revenues and costs" and presents only relevant costs and revenues.
Special Pricing Decisions
- Accepting or rejecting special orders with spare production capacity is one such decision.
- Special orders have no long-run implications.
- Special order decisions are typically one-time only orders or orders below the market price.
- Since relevant revenues exceed relevant costs the order is acceptable subject to the following assumptions;
- Special one-time only order and the normal selling price will not be affected.
- No better opportunities and resources have no are available or alternative use.
- Fixed costs are unavoidable.
- The assumption of no long-run or strategic implicationsis necessary to make special-order decisions
Outsourcing Decisions
- Outsourcing is short-run, and the purchasing goods and services from outside suppliers rather than insourcing.
- In short-term outsourcing decisions, the capacity now used to make the doors will become spare if the doors are purchased.
- Any fixed costs will continue to be incurred regardless of the decision made.
- "Making doors" is sometimes be the preferred alternative.
- If D&W accepts the order, the profit increases and D&W should accept the order.
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