Decision-Making

1. Decision-Making

2. learning objectivesthe scope of decision-makingthe seven steps of the decision-making process relevant costsexamples of practical areas of decision-makingmarginal costing and shutdown or continuation decisions Session Summary (1)

3. make versus buyproduct mix decisions and limiting factorssales pricingprofit volume (PV) chart and contribution curve profit volume (PV) chart and contribution curve banddecision treesexample of a decision tree Session Summary (2)

4. explain the scope and importance of decision-makingto an organisationoutline the decision-making processexplain the significance of the concept of relevant costsapply marginal costing techniques to decision-making Learning Objectives (1)

5. evaluate shut-down or continuation decisionscritically compare make or buy alternativesconsider the problem of product mix, scarce resourcesand limiting factorsconsider the wide range of sales pricing optionsuse a decision tree to determine expected values of alternative outcomes Learning Objectives (2)

6. The Scope of Decision-Making

7. The Seven Steps of the Decision-Making Process

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

9. Costs that are generally relevant materials costsdifferential costsopportunity costsvariable costs Relevant Costs (2)

10. Costs that are generally not relevantcapital expenditure already made or committedfixed costsdepreciationsunk costscommitted costsnotional costs Relevant Costs (3)

11. Examples of Practical Areas of Decision-Making

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

13. 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

14. 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)

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

16. 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)

17. 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 datasales pricing policy is based on cost and market factors that influence demand for the product Sales Pricing (2)

18. Profit Volume (PV) Chart and Contribution Curve

19. Profit Volume (PV) Chart and Contribution Curve Band

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

21. Example of a Decision Tree