McGraw-Hill/Irwin 14-1 Decision Making: Decision Making: Relevant Costs and Benefits Relevant Costs and Benefits 14 ChapterFourteen

McGraw-Hill/Irwin 14-2 The Managerial Accountant’s Role in Decision Making Designs and implements accounting information system Designs and implements accounting information system Cross-functional management teams who make production, marketing, and finance decisions Cross-functional management teams who make production, marketing, and finance decisions Make substantive economic decisions affecting operations Make substantive economic decisions affecting operations ManagerialAccountantManagerialAccountant

McGraw-Hill/Irwin 14-3 The Decision-Making Process 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data 6. Make a Decision QuantitativeAnalysis

McGraw-Hill/Irwin 14-4 The Decision-Making Process 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data 6. Make a Decision Primarily the responsibility of the managerialaccountant. Primarily the responsibility of the managerialaccountant. Information should be: 1. Relevant 2. Accurate 3. Timely Information should be: 1. Relevant 2. Accurate 3. Timely

McGraw-Hill/Irwin 14-5 The Decision-Making Process 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data 6. Make a Decision Relevant Pertinent to a decision problem.Relevant Pertinent to a decision problem. Accurate Information must be precise.Accurate Information must be precise. Timely Available in time for a decisionTimely Available in time for a decision

McGraw-Hill/Irwin 14-6 The Decision-Making Process 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data 6. Make a Decision Qualitative Considerations Qualitative Considerations

McGraw-Hill/Irwin 14-7 Relevant Information Information is relevant to a decision problem when... Ê It has a bearing on the future, Ë It differs among competing alternatives. Information is relevant to a decision problem when... Ê It has a bearing on the future, Ë It differs among competing alternatives.

McGraw-Hill/Irwin 14-8 Identifying Relevant Costs and Benefits Sunk costs Costs that have already been incurred. They do not affect any future cost and cannot be changed by any current or future action. Sunk costs are irrelevant to decisions.

McGraw-Hill/Irwin 14-9 Add or Drop a Product

McGraw-Hill/Irwin Summary DECISION RULE Swick should drop the digital watch segment only if its fixed cost savings exceed lost contribution margin.

McGraw-Hill/Irwin Special Decisions in Manufacturing Firms Joint Products: Sell or Process Further A joint production process resulting in two or more products. The point in the production process where the joint products are identifiable as separate products is called the split-off point. Joint Products: Sell or Process Further A joint production process resulting in two or more products. The point in the production process where the joint products are identifiable as separate products is called the split-off point.

McGraw-Hill/Irwin Cocoa beans costing $500 per ton Joint Production process costing $600 per ton Cocoa butter sales value $750 for 1,500 pounds Cocoa powder sales value $500 for 500 pounds Separableprocesscosting$800 Instant cocoa mix sales value $2,000 for 500 pounds Joint Processing of Cocoa Bean Joint Processing of Cocoa Bean Total joint cost: $1,100 per ton Split-off point

McGraw-Hill/Irwin Theory of Constraints Binding constraints can limit a company’s profitability. To relax constraints management can... OutsourceOutsource Work overtime Retrain employees Reduce non-value- added activities Reduce non-value- added activities

McGraw-Hill/Irwin End of Chapter 14