If everything were the same, we would have no need of statistics. But, people's heights, ages, etc.
Key terms The need for a decision arises in business because a manager is faced with a problem and alternative courses of action are available. In deciding which option to choose he will need all the information which is relevant to his decision; and he must have some criterion on the basis of which he can choose the best alternative.
Some of the factors affecting the decision may not be expressed in monetary value. Hence, the manager will have to make 'qualitative' judgements, e. A 'quantitative' decision, on the other hand, is possible when the various factors, and relationships between them, are measurable.
This chapter will concentrate on quantitative decisions based on data expressed in monetary value and relating to costs and revenues as measured by the management accountant. This chapter is intended to provide: Structure of the chapter Often "information" is interpreted by marketers as being "external" market based information.
However, "internal" sources are just as important, none more so than financial information. The chapter looks at the relevant elements of cost for decision making, then looks at the various techniques including breakeven analysis.
Other important business decisions are whether to source components internally or have them brought in from outside, and whether to continue with operations if they appear uneconomic. The chapter examines the techniques useful in helping to make decisions in these areas.
Elements of a decision A quantitative decision problem involves six parts: It is therefore common to find an objective that will maximise profits subject to defined constraints. For example, in order to minimise costs of a manufacturing operation, the available alternatives may be: The costs which should be used for decision making are often referred to as "relevant costs".
CIMA defines relevant costs as 'costs appropriate to aiding the making of specific management decisions'. To affect a decision a cost must be: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.
Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision.
Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant. Costs which will be identical for all alternatives are irrelevant, e. Another name for past costs, which are always irrelevant, e.
A future cash outflow that will be incurred anyway, whatever decision is taken now, e. Relevant costs may also be expressed as opportunity costs. An opportunity cost is the benefit foregone by choosing one opportunity instead of the next best alternative.
Example A company is considering publishing a limited edition book bound in a special leather. The company has no plans to use the leather for other purposes, although it has considered the possibilities: The cost was incurred in the past for some reason which is no longer relevant.
The leather exists and could be used on the book without incurring any specific cost in doing so. The better of these alternatives, from the point of view of benefiting from the leather, is the latter.
The relevant costs for decision purposes will be the sum of: This total is a true representation of 'economic cost'. Now attempt exercise 5. The job would require the following materials.SI Unit rules and style conventions Abbreviations such as sec, cc, or mps are avoided and only standard unit symbols, prefix symbols, unit names, and prefix names are used.
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