(Script) BUS-91-Introduction to Decision Making and Relevant costs.docx

**BUS-091 MANAGERIAL ACCOUNTING** **Module 4** **Lesson (Script)** We\'re going to do a brief introduction into relevant costs that are used for short term business decisions. So we\'re going to see how managers use their knowledge of cost behavior to make special business decisions, like whether...

**BUS-091 MANAGERIAL ACCOUNTING** **Module 4** **Lesson (Script)** We\'re going to do a brief introduction into relevant costs that are used for short term business decisions. So we\'re going to see how managers use their knowledge of cost behavior to make special business decisions, like whether or not to outsource operating activities. The decisions that we\'re going to focus on in this particular chapter, pertain to short periods of time. So managers don\'t need to worry about something called time value of money. We\'ll cover that later. Okay, so here\'s some examples or just some basic terminology. Revelant costs are going to be incurred in the future. For example, if you\'re deciding to buy a new car, those costs cannot be incurred in the past relevant costs differ between alternatives. So for example, if we are buying a new car, each car is going to have a different invoice price, sales tax, and insurance premium. the differences between your two top choices in cars will be the relevant costs. because they affect your decision of which car to purchase. if you\'re considering closing one of your stores, the amount you pay the company\'s CEO is irrelevant because they will retain their job. The CEO will earn the same pay regardless of whether the store remains open Now, we also have something called irrelevant costs. Those are costs that do not affect your decision. Irrelevant costs do not differ between alternatives. An example here will be a sunk cost. These are costs that have been incurred in the past and cannot be changed regardless of what future action we take. So when we\'re deciding whether or not to keep our old car or buy a new one, the purchase price of the old car is irrelevant. It is a sunk cost. It\'s already been incurred. There\'s nothing we can do to change that. We also have something up here called opportunity cost. this is the cost of, choosing one course of action and what we must give up in order to benefit from some other course of action. if we use a machine to make one type of product, the benefit of making another type of product with that machine is lost. That would be our opportunity cost. relevant non financial information has the same characteristics as relevant financial information. the qualitative factor occurs in the future and it differs between alternatives. Non financial or qualitative factors also play a role in managerial decisions, like closing manufacturing, a manufacturing plant will seriously hurt the local community, or laying off employees impacts on the remaining employees morale. Thank you all. Outsourcing gives you reduced control over delivery time and product quality. Discounted prices to select customers upset our regular customers. managers have to think through the likely quantitative and qualitative effects of their decisions. Managers who ignore the qualitative factors can make serious mistakes. Here\'s some examples of short term decisions we can make. Whether or not to accept a special order, pricing issues, discontinuing products, or even stores, what type of product mix we should use, outsourcing, whether we should make a product or buy it from someone else, or should we sell or process further? Now as you study these questions, keep in mind the two keys in analyzing short term special business decisions. to be relevant, the cost must be. Both in the future and must differ between alternatives. instead of looking at a company\'s entire income statement under each decision alternative, we will look just at how operating income would change or differ under each alternative. Using this approach, we will leave out irrelevant information and the costs and revenues that will not differ between alternatives. So we\'ll only focus on the relevant information. Irrelevant information only clouds the picture and creates information overload. That\'s why we use the incremental analysis approach. Because fixed cost and variable cost behave differently, we have to analyze them separately. Contribution margin income statements, which isolate costs by behavior, meaning variable or fixed, help managers gather cost behavior information they need. And keep in mind that the unit manufacturing costs are mixed costs too, so they can mislead managers. If you use unit manufacturing costs in your analysis, you have to make sure you separate into the fixed and variable components first. For companies that embrace sustainability and the triple bottom line, almost every decision will be viewed through the lens of its impact on people, planet, as well as profitability. For example, Timberland is committed to doing well and doing good. Timberland\'s initiatives are costly, but this company, like others, does not measure its success strictly in terms of stock market returns.