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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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