Questions and Answers
What is a critical factor in the decision-making process?
Managers only make long-term decisions within an organization.
False
What role do management accountants play in decision-making?
They provide information to help management make informed decisions.
Decision making always involves a choice between alternative courses of ______.
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Match the following types of accounting information with their corresponding users:
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Which of the following is NOT a type of decision managers make?
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The decision-making process cannot be analyzed into a sequence of steps.
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What may management consider when actual results are poor?
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What is the first step in the decision-making process?
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Relevant costs only include historical data.
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What is a sunk cost?
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The __________ represents the amount of money a company would need to receive to not be worse off when deprived of an asset.
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Match the following terms to their definitions:
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Which of the following is NOT considered a limiting factor?
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In decision-making, managers should only consider financial factors.
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What should be done after analyzing alternatives?
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A __________ is the maximum contribution to profit that can be derived from a unit of a limiting factor.
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What criteria may be used to recognize decision-making goals?
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Each alternative should be analyzed against its financial outcome only.
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What does contribution equal?
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Decisions should be based on __________ cash flows.
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In limiting factor decision making, what is aimed to be maximized?
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Only one alternative should be considered when resolving a problem.
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What is the importance of identifying decision-making criteria?
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If labor is the only limiting factor, we can ignore the sales demand when planning production.
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What determines the optimal production plan?
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What is the hourly wage for direct labor as mentioned?
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Jam Co. has limited raw material availability of ______ kg.
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In the make-or-buy decision, the decision should be based solely on cost considerations.
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Which of the following is NOT a primary activity in an organization's value chain?
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Outsourcing guarantees that all services will be performed satisfactorily.
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What is the primary benefit of outsourcing an activity?
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The concept of a value chain was suggested by __________.
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Match the advantages of outsourcing with their corresponding descriptions:
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Which of the following is a disadvantage of outsourcing?
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Mercedes reduced the number of suppliers from 35 to one for some parts.
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What is a common risk organizations face when outsourcing?
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Coca Cola does not outsource the manufacture of its __________ to maintain control.
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Which of the following activities are candidates for outsourcing?
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What is an important reason for organizations to consider outsourcing activities?
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The company would incur additional fixed costs by subcontracting component Z.
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What is the term used to describe the use of external suppliers for finished products, components or services?
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The extra variable cost of buying component W is $______ per annum.
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Using external suppliers for components always guarantees a higher quality product.
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What can organizations gain by outsourcing that allows them to focus on their main business?
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What is one disadvantage of keeping internal facilities for specialized components?
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Specialist contractors may not have advanced machinery for production.
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What is one risk associated with outsourcing?
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The company's total fixed costs incurred as a consequence of making X is $______.
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Which of the following is NOT a benefit of outsourcing?
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What should organizations establish with key suppliers to minimize risks of outsourcing?
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Study Notes
Introduction to Decision Making
- Decision making involves choosing between alternative courses of action.
- Relevant and reliable information is crucial for effective decision making.
- Management at all levels makes decisions, affecting both long-term and short-term goals.
- Management accountants supply necessary information to facilitate informed decisions.
Decision-Making Process
- Steps in the decision-making process:
- Define the problem, ensuring awareness of its existence.
- Identify decision-making criteria based on goals (e.g., maximizing profits).
- Develop alternative solutions aligning with decision-making criteria.
- Collect and analyze relevant data for each alternative.
- Select the best alternative that meets organizational goals.
- Implement the chosen decision.
Relevant Costs
- Relevant costs are future cash flows specifically tied to a decision.
- Decisions must focus on future incremental cash flows, not past or sunk costs.
- Types of relevant costs:
- Differential costs: the difference in total costs between alternatives.
- Opportunity costs: the value of the benefit lost when choosing one option over another.
- Typically, variable costs are relevant while fixed costs are often irrelevant.
Choice of Product (Product Mix) Decisions
- A limiting factor restricts an organization’s ability to produce or sell products (e.g., demand, labor, materials).
- Maximum contribution is gained by selecting product mixes that optimize the use of the limiting factor.
- Contribution is calculated as sales revenue minus variable costs.
Limiting Factor Analysis
- To determine the profit-maximizing production mix:
- Analyze contribution per unit of the limiting factor (e.g., labor hours).
- Prioritize products that yield the highest contribution per unit of the limiting factor.
Make or Buy Decisions
- A make or buy decision evaluates whether to produce in-house or purchase from an external supplier.
- Relevant costs for decision making consider both variable and differential costs.
- Factors other than cost should also be considered, such as control over operations, reliability of suppliers, and the potential impact on internal resources.
Outsourcing
- Outsourcing helps organizations focus on core competencies by utilizing external suppliers for non-core activities.
- Key reasons for outsourcing include access to specialized skills, enhanced quality, and efficiency.
- Decisions to outsource should weigh the benefits of external expertise against the need for control over production.
- Comprises primary activities (inbound logistics, operations, outbound logistics, marketing, and service) and secondary activities (infrastructure, human resources, technology, procurement).
- Both primary and support activities are candidates for outsourcing.
- Certain activities cannot be outsourced or must be controlled to maintain competitive advantage.
Outsourcing Decisions
- Organizations should only carry out activities where they can match the performance of the best in the field.
- Activities that cannot meet benchmark performance levels should be outsourced.
- Coca Cola retains manufacturing control of its concentrate to protect its formula.
Advantages of Outsourcing
- Frees up staff time from contracted activities and support roles (e.g., supervisory personnel).
- Access to specialized expertise and equipment without the need for in-house investment.
- Potentially lower costs when considering time savings and opportunity costs.
- Particularly beneficial during expansion periods, providing additional capacity without full funding.
Disadvantages of Outsourcing
- Lack of monitoring can lead to unsatisfactory service delivery.
- Potential for outsourcing to be more expensive than in-house services.
- Organizations may lose the opportunity to develop essential skills by outsourcing.
- Risks associated with sensitive data exposure due to outsourcing information handling.
- Ethical issues may arise, including staff exploitation and poor conditions.
- Employee opposition is likely if outsourcing results in redundancies.
Mitigating Outsourcing Risks
- Organizations typically engage in long-term contracts with suppliers detailing costs, quality, and delivery schedules.
- Building strong partnerships with key suppliers can enhance collaboration on design and manufacturing.
- Focus on creating a culture of commitment to quality and timely delivery.
Case Study: Mercedes Approach
- Adopted extreme outsourcing by contracting suppliers for complete modules instead of individual parts.
- Resulted in decreased plant and warehouse space requirements.
- Reduced the number of suppliers, for example, from 35 to 1 for cockpit assembly.
- Initial strict controls on first-tier suppliers enabled later trust-based agreements allowing them to manage second-tier suppliers.
Benefits for Mercedes
- Lower purchasing overhead costs.
- Reduced labor and employee-related expenses.
- Improved service level from suppliers.
- Supplier expertise contributes to operational improvements.
- Collaborative efforts among suppliers to enhance both individual modules and integrated products.
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Description
This quiz covers the fundamentals of decision making, including the importance of relevant information and the structured decision-making process. It delves into how management accountants assist in making informed choices that affect organizational goals. Test your understanding of relevant costs and their significance in the decision-making process.