Decision-Making

learning objectives the scope of decision-making the seven steps of the decision-making process relevant costs examples of practical areas of decision-making marginal costing and shutdown or continuation decisions Session Summary (1)

make versus buy product mix decisions and limiting factors sales pricing profit volume (PV) chart and contribution curve profit volume (PV) chart and contribution curve band decision trees example of a decision tree Session Summary (2)

explain the scope and importance of decision-making to an organisation outline the decision-making process explain the significance of the concept of relevant costs apply marginal costing techniques to decision-making Learning Objectives (1)

evaluate shut-down or continuation decisions critically compare make or buy alternatives consider the problem of product mix, scarce resources and limiting factors consider the wide range of sales pricing options use a decision tree to determine expected values of alternative outcomes Learning Objectives (2)

The Scope of Decision-Making

The Seven Steps of the Decision-Making Process

the decision-making process includes identification of relevant costs, and starts with the identification of objectives following the implementation of decisions, the process ends with the comparison of actual results with expected outcomes relevant costs, or incremental or differential costs, arise as direct consequence of a decision, which may differ between alternative options Relevant Costs (1)

Costs that are generally relevant materials costs differential costs opportunity costs variable costs Relevant Costs (2)

Costs that are generally not relevant capital expenditure already made or committed fixed costs depreciation sunk costs committed costs notional costs Relevant Costs (3)

Examples of Practical Areas of Decision-Making

marginal costing may be used to assist in shutdown or continuation decisions a shut-down decision that is based on absorption costing may not be a good decision if a contribution is being made towards covering fixed costs Marginal Costing and Shut-down or Continuation Decisions

make versus buy decisions involve consideration of a wider range of factors than simply the differences in the basic cost, for example: cost price sensitivity accuracy of data reliability of bought-in materials supplier switching costs delivery reliability financial stability cost price stability opportunity costs Make versus Buy

organisations do not have access to unlimited supplies of resources, for example labour hours levels of labour skills machine capacity time market demand components and raw materials cash Product Mix Decisions and Limiting Factors (1)

a limiting factor is the lack of any resource which limits the activity of the organisation product mix decisions are influenced by the scarcity of resources and the availability of limiting factors Product Mix Decisions and Limiting Factors (2)

sales pricing policy is just one of the four categories of decision included in the marketing mix of price product place promotion Sales Pricing (1)

there is a variety of methods that may be used to determine selling prices, which may be included under the general headings of: cost plus pricing pricing based on demand and using market data sales pricing policy is based on cost and market factors that influence demand for the product Sales Pricing (2)

Profit Volume (PV) Chart and Contribution Curve

Profit Volume (PV) Chart and Contribution Curve Band

decision trees enable a sequence of interrelated decisions, and their expected outcomes, to be reported pictorially Decision Trees

Example of a Decision Tree