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MODULE 6 - L1
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MODULE 6 - L1

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@PalatialGenre

Questions and Answers

What is a critical factor in the decision-making process?

  • Personal biases
  • Intuition
  • Relevant and reliable information (correct)
  • Experience of the manager

    • 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 ______.

    <p>action</p> Signup and view all the answers

    Match the following types of accounting information with their corresponding users:

    <p>Revenue generation = Manager Cash flows = Lender Performance targets = Executive Cost analysis = Operations manager</p> Signup and view all the answers

    Which of the following is NOT a type of decision managers make?

    <p>Emotional decisions</p> Signup and view all the answers

    The decision-making process cannot be analyzed into a sequence of steps.

    <p>False</p> Signup and view all the answers

    What may management consider when actual results are poor?

    <p>Whether corrective action should be taken.</p> Signup and view all the answers

    What is the first step in the decision-making process?

    <p>Define the problem</p> Signup and view all the answers

    Relevant costs only include historical data.

    <p>False</p> Signup and view all the answers

    What is a sunk cost?

    <p>A past cost that is not relevant in decision making.</p> 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.

    <p>deprival value</p> Signup and view all the answers

    Match the following terms to their definitions:

    <p>Differential cost = Difference in total cost between alternatives Opportunity cost = Value of the benefit sacrificed when choosing one action Variable costs = Costs that typically vary with production volume Fixed costs = Costs that do not change with production volume</p> Signup and view all the answers

    Which of the following is NOT considered a limiting factor?

    <p>Historical Cost</p> Signup and view all the answers

    In decision-making, managers should only consider financial factors.

    <p>False</p> Signup and view all the answers

    What should be done after analyzing alternatives?

    <p>Select an alternative.</p> Signup and view all the answers

    A __________ is the maximum contribution to profit that can be derived from a unit of a limiting factor.

    <p>limiting factor</p> Signup and view all the answers

    What criteria may be used to recognize decision-making goals?

    <p>Maximize profits</p> Signup and view all the answers

    Each alternative should be analyzed against its financial outcome only.

    <p>False</p> Signup and view all the answers

    What does contribution equal?

    <p>Sales revenue less variable costs.</p> Signup and view all the answers

    Decisions should be based on __________ cash flows.

    <p>future incremental</p> Signup and view all the answers

    In limiting factor decision making, what is aimed to be maximized?

    <p>Total contribution</p> Signup and view all the answers

    Only one alternative should be considered when resolving a problem.

    <p>False</p> Signup and view all the answers

    What is the importance of identifying decision-making criteria?

    <p>It helps in understanding what objectives need to be met.</p> Signup and view all the answers

    If labor is the only limiting factor, we can ignore the sales demand when planning production.

    <p>True</p> Signup and view all the answers

    What determines the optimal production plan?

    <p>Available labor hours</p> Signup and view all the answers

    What is the hourly wage for direct labor as mentioned?

    <p>$3</p> Signup and view all the answers

    Jam Co. has limited raw material availability of ______ kg.

    <p>2000</p> Signup and view all the answers

    In the make-or-buy decision, the decision should be based solely on cost considerations.

    <p>False</p> Signup and view all the answers

    Which of the following is NOT a primary activity in an organization's value chain?

    <p>Procurement</p> Signup and view all the answers

    Outsourcing guarantees that all services will be performed satisfactorily.

    <p>False</p> Signup and view all the answers

    What is the primary benefit of outsourcing an activity?

    <p>It allows the organization to focus on core activities that enhance its competitive advantage.</p> Signup and view all the answers

    The concept of a value chain was suggested by __________.

    <p>Michael Porter</p> Signup and view all the answers

    Match the advantages of outsourcing with their corresponding descriptions:

    <p>It frees up staff time = Allows existing staff to focus on core tasks Specialist expertise = Uses outside expertise rather than investing in facilities Cost savings = May reduce costs compared to in-house services Capacity benefits = Enables expansion without full cost funding</p> Signup and view all the answers

    Which of the following is a disadvantage of outsourcing?

    <p>Risk of losing commercially sensitive data</p> Signup and view all the answers

    Mercedes reduced the number of suppliers from 35 to one for some parts.

    <p>True</p> Signup and view all the answers

    What is a common risk organizations face when outsourcing?

    <p>Lack of control and oversight over the quality of services provided.</p> Signup and view all the answers

    Coca Cola does not outsource the manufacture of its __________ to maintain control.

    <p>concentrate</p> Signup and view all the answers

    Which of the following activities are candidates for outsourcing?

    <p>Activities that can be delivered comparably to the best organizations</p> Signup and view all the answers

    What is an important reason for organizations to consider outsourcing activities?

    <p>To focus on core competencies</p> Signup and view all the answers

    The company would incur additional fixed costs by subcontracting component Z.

    <p>False</p> Signup and view all the answers

    What is the term used to describe the use of external suppliers for finished products, components or services?

    <p>Outsourcing</p> Signup and view all the answers

    The extra variable cost of buying component W is $______ per annum.

    <p>2,000</p> Signup and view all the answers

    Using external suppliers for components always guarantees a higher quality product.

    <p>False</p> Signup and view all the answers

    What can organizations gain by outsourcing that allows them to focus on their main business?

    <p>Freed capital and management time</p> Signup and view all the answers

    What is one disadvantage of keeping internal facilities for specialized components?

    <p>Increased complexity and resource allocation</p> Signup and view all the answers

    Specialist contractors may not have advanced machinery for production.

    <p>False</p> Signup and view all the answers

    What is one risk associated with outsourcing?

    <p>Reliability of supplier</p> Signup and view all the answers

    The company's total fixed costs incurred as a consequence of making X is $______.

    <p>5,000</p> Signup and view all the answers

    Which of the following is NOT a benefit of outsourcing?

    <p>Full control over production</p> Signup and view all the answers

    What should organizations establish with key suppliers to minimize risks of outsourcing?

    <p>Close long-term partnerships</p> 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.

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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.

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