Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Decision Making: Relevant Costs and Benefits Decision Making:

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Financial and Managerial Accounting

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Decision Making: Relevant Costs and Benefits

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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Decision Making: Relevant Costs and Benefits Decision Making: Relevant Costs and Benefits Chapter 14

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

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

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

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 Qualitative Considerations Qualitative Considerations

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 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

14-7 Relevant Information Information is relevant to a decision problem when It has a bearing on the future, 2. It differs among competing alternatives. Information is relevant to a decision problem when It has a bearing on the future, 2. It differs among competing alternatives.

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.

14-9 Analysis of Special Decisions The Text Book takes you through some special decisions faced by many businesses: 1.Accept or Reject a special order 2.Outsource a Product or Service 3.Add or Drop a Service, Product or Department 4.Special Decisions in Manufacturing 5.Decisions Involving Limited Resources

14-10 Other Issues in Decision Making Incentives for Decision Makers Incentives for Decision Makers Short-Run Versus Long-Run Decisions Short-Run Versus Long-Run Decisions

14-11 Other Issues in Decision Making Pitfalls to Avoid Sunkcosts.Sunkcosts. Unitized fixed costs. Unitized Allocated Allocated Opportunitycosts.Opportunitycosts.

14-12 End of Chapter 14