Further short-term decisions Financial Decision Making - Further short-term decisions

Making short-term decisions Examples of short-term decisions Considering relevant costs and revenues Differential /incremental costs and revenues Material and labour costs Non-financial issues Reading: Management Accounting for Business chapter 4 Financial Decision Making – Further short-term decisions

Examples of short-term decisions Special pricing decisions Make/ buy decisions Discontinuing operations Product mix with limited capacity Financial Decision Making – Further short-term decisions

Financial Decision Making - Further short-term decisions Relevant costs Costs which change as a result of the decision or vary between options Ignore sunk (historic) costs Ignore future costs which are not affected by the decision Eg fixed costs (note: short-term assumption) Can often focus on contribution Financial Decision Making - Further short-term decisions

Relevant costs of materials Generally the future replacement cost Is the item in stock? Is it required for making other items? Could it be sold if not used? - opportunity cost Will it cost anything to dispose of it? Financial Decision Making – Further short-term decisions

Relevant cost of labour Is there spare labour? What will the staff do if we don’t use them here? – opportunity cost Will additional staff be required for this contract? Financial Decision Making – Further short-term decisions

Financial Decision Making – Further short-term decisions Non-financial issues Need to consider non-financial issues alongside finance such as: Marketing Quality Reputation Human resources Financial Decision Making – Further short-term decisions

Special pricing decisions Relates to one-off orders Minimum price = total relevant cost Need to consider opportunity costs Example – the price of the car with the reconditioned engine in week 2 Financial Decision Making – Further short-term decisions

Make or buy (outsourcing) Should we buy this component in or make it ourselves? Should we undertake this activity or buy in a service? Financial Decision Making – Further short-term decisions

Discontinuing operations Various possible scenarios: Closing a sales office Stopping production and sale of a product Consider impact on costs and revenues May be significant non-financial factors to consider Financial Decision Making – Further short-term decisions

Product mix with capacity constraints What products should be made if capacity is limited? Limitation may be resources, space, machine time Aim to maximise profit - by maximising contribution Single constraint – choose products with highest contribution for each unit of limited resource Financial Decision Making – Further short-term decisions