Revision Notes On Short-term decision making

November 13th, 2007 Comments off
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(1)  Costs for decision-making should be separated into their fixed and variable components

(2)  Fixed costs should not be averaged or absorbed when preparing information for decision-making 

(3)  Marginal costing statements are useful for decision-making; absorption costing statements are not. 

(4)  When a resource is scarce, it should be used in the way which produces the HIGHEST CONTRIBUTION PER UNIT OF SCARCE RESOURCE. 

(5)   Where a business has several products, each of which have a limited demand and there is a limited amount of one resource ie a limiting factor, we should

·  Calculate the contribution per unit of limiting factor for each product;

·  Rank the products by contribution per unit of limiting factor;

·  Produce the maximum that can be sold of the product with the highest contribution per unit of limiting factor;

·  Repeat for the next best product and so on until the scarce resource is used up.

(6)   They may be good marketing reasons for adopting a production plan which is not the most profitable in the short term. 

(7)   Limiting factors are present whether in Service activities or Manufacturing activities. 

(8)   We cannot rely entirely upon ranking the contribution per unit of limiting factor when choosing between several individual jobs or contracts each of which uses large proportions of the limiting factor. The optimum solution is that which produces the HIGHEST OVERALL CONRIBUTION FROM THE LIMITING FACTOR, even if this means that some is left unused. 

(9)   The limiting factor may be a small group of workers or a small part of a process(a bottleneck). The use of the bottleneck should be optimized b producing the MIX of products which MAXIMISES the contribution obtained from its use. 

(10) Problems which concern 2 or more outputs and 2 or more limiting factors can be solved using LINEAR PROGRAMMNG

(11) We can used simultaneous equations to solve linear programming problems but a graphical solution is preferable as the problem and its solution are clearer. 

(12) Make or Buy decisions cannot be taken solely on the basis of comparing internal manufacturing costs with subcontracting costs. Subcontracting may cause extra inspection, storage and administration costs.

(13) The total cost of subcontracting should be compared with the RELEVANT COSTS of manufacturing.

(14) The marginal contribution per unit of a scarce resource is called its shadow price. An alternative way of describing shadow price is “ the opportunity cost of a scarce resource”

(15) Relevant manufacturing costs include the OPPORTUNITY costs(shadow prices) of any scarce resources used.

(16)Even if it appears cheaper to subcontract, it may be wiser to produce in-house to avoid quality and or delivery problems.

(17) A business should accept a SPECIAL ORDER if it provides a contribution and acceptance will not affect its long-term market.

(18) Not all the costs provided by a firm’s costing system are relevant for decision-making. Ignore SUNK,COMMITTED AND NOTIONAL COSTS.

(19) There will be opportunity costs in accepting a special order if a business is working AT FULL CAPACITY.

(20) Cost records can be misleading when trying to identify which products or departments should be considered for CLOSURE. An apparent loss-maker may be generating a contribution, so if it were closed the organization would be worse off.

(21) When identifying products or department for CLOSURE, only the costs affected by the decision should be considered ie VARIABLE COSTS, SPECIFIC FIXED COSTS AND OPPORTUNITY COSTS.

(22) DIFFENTIAL ( or INCREMENTAL) cost is “ the difference in total cost between ALTERNATIVES”. Differential costing is used to assist decision-making in cost-only cases where revenue is not relevant

(23) Short term decision-making techniques do have limitations. They may not include all the information relevant to a decision. They assume that costs and circumstances will not change and ignore the time value of money. They are more accurately describe as “decision-aiding techniques” because managers will still need to use their judgement before deciding on a course of action. 

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