Podcast
Questions and Answers
What is a critical factor in the decision-making process?
What is a critical factor in the decision-making process?
Managers only make long-term decisions within an organization.
Managers only make long-term decisions within an organization.
False
What role do management accountants play in decision-making?
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 ______.
Decision making always involves a choice between alternative courses of ______.
Signup and view all the answers
Match the following types of accounting information with their corresponding users:
Match the following types of accounting information with their corresponding users:
Signup and view all the answers
Which of the following is NOT a type of decision managers make?
Which of the following is NOT a type of decision managers make?
Signup and view all the answers
The decision-making process cannot be analyzed into a sequence of steps.
The decision-making process cannot be analyzed into a sequence of steps.
Signup and view all the answers
What may management consider when actual results are poor?
What may management consider when actual results are poor?
Signup and view all the answers
What is the first step in the decision-making process?
What is the first step in the decision-making process?
Signup and view all the answers
Relevant costs only include historical data.
Relevant costs only include historical data.
Signup and view all the answers
What is a sunk cost?
What is a sunk cost?
Signup and view all the answers
The __________ represents the amount of money a company would need to receive to not be worse off when deprived of an asset.
The __________ represents the amount of money a company would need to receive to not be worse off when deprived of an asset.
Signup and view all the answers
Match the following terms to their definitions:
Match the following terms to their definitions:
Signup and view all the answers
Which of the following is NOT considered a limiting factor?
Which of the following is NOT considered a limiting factor?
Signup and view all the answers
In decision-making, managers should only consider financial factors.
In decision-making, managers should only consider financial factors.
Signup and view all the answers
What should be done after analyzing alternatives?
What should be done after analyzing alternatives?
Signup and view all the answers
A __________ is the maximum contribution to profit that can be derived from a unit of a limiting factor.
A __________ is the maximum contribution to profit that can be derived from a unit of a limiting factor.
Signup and view all the answers
What criteria may be used to recognize decision-making goals?
What criteria may be used to recognize decision-making goals?
Signup and view all the answers
Each alternative should be analyzed against its financial outcome only.
Each alternative should be analyzed against its financial outcome only.
Signup and view all the answers
What does contribution equal?
What does contribution equal?
Signup and view all the answers
Decisions should be based on __________ cash flows.
Decisions should be based on __________ cash flows.
Signup and view all the answers
In limiting factor decision making, what is aimed to be maximized?
In limiting factor decision making, what is aimed to be maximized?
Signup and view all the answers
Only one alternative should be considered when resolving a problem.
Only one alternative should be considered when resolving a problem.
Signup and view all the answers
What is the importance of identifying decision-making criteria?
What is the importance of identifying decision-making criteria?
Signup and view all the answers
If labor is the only limiting factor, we can ignore the sales demand when planning production.
If labor is the only limiting factor, we can ignore the sales demand when planning production.
Signup and view all the answers
What determines the optimal production plan?
What determines the optimal production plan?
Signup and view all the answers
In the make-or-buy decision, the decision should be based solely on cost considerations.
In the make-or-buy decision, the decision should be based solely on cost considerations.
Signup and view all the answers
Which of the following is NOT a primary activity in an organization's value chain?
Which of the following is NOT a primary activity in an organization's value chain?
Signup and view all the answers
Outsourcing guarantees that all services will be performed satisfactorily.
Outsourcing guarantees that all services will be performed satisfactorily.
Signup and view all the answers
What is the primary benefit of outsourcing an activity?
What is the primary benefit of outsourcing an activity?
Signup and view all the answers
The concept of a value chain was suggested by __________.
The concept of a value chain was suggested by __________.
Signup and view all the answers
Match the advantages of outsourcing with their corresponding descriptions:
Match the advantages of outsourcing with their corresponding descriptions:
Signup and view all the answers
Which of the following is a disadvantage of outsourcing?
Which of the following is a disadvantage of outsourcing?
Signup and view all the answers
What is a common risk organizations face when outsourcing?
What is a common risk organizations face when outsourcing?
Signup and view all the answers
Which of the following activities are candidates for outsourcing?
Which of the following activities are candidates for outsourcing?
Signup and view all the answers
What is an important reason for organizations to consider outsourcing activities?
What is an important reason for organizations to consider outsourcing activities?
Signup and view all the answers
What is the term used to describe the use of external suppliers for finished products, components or services?
What is the term used to describe the use of external suppliers for finished products, components or services?
Signup and view all the answers
Using external suppliers for components always guarantees a higher quality product.
Using external suppliers for components always guarantees a higher quality product.
Signup and view all the answers
What can organizations gain by outsourcing that allows them to focus on their main business?
What can organizations gain by outsourcing that allows them to focus on their main business?
Signup and view all the answers
What is one disadvantage of keeping internal facilities for specialized components?
What is one disadvantage of keeping internal facilities for specialized components?
Signup and view all the answers
Specialist contractors may not have advanced machinery for production.
Specialist contractors may not have advanced machinery for production.
Signup and view all the answers
What is one risk associated with outsourcing?
What is one risk associated with outsourcing?
Signup and view all the answers
Which of the following is NOT a benefit of outsourcing?
Which of the following is NOT a benefit of outsourcing?
Signup and view all the answers
What should organizations establish with key suppliers to minimize risks of outsourcing?
What should organizations establish with key suppliers to minimize risks of outsourcing?
Signup and view all the answers
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
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.
