Accounting for Managers Module 12 Managerial Decisions Managerial

Accounting for Managers Module 12: Managerial Decisions

Managerial Decision-Making

Differential Analysis • • • Involves looking at all possible scenarios of a decision but ignoring some costs that are not relevant Key terms: • • • Differential cost (relevant cost): difference in cost between two choices Differential revenue (relevant benefits): difference in revenue between two choices Sunk cost: cost that has already occurred and is unavoidable Avoidable cost: cost that can be eliminated depending on decision Opportunity cost: potential benefit given up if alternative decision is made Must look at all costs involved then determine which ones matter for decision we are making

Qualitative Factors • • • Affect quality of life rather than your bank account • less time at home, home office takes up space in home, etc. Decision that looks great financially may cause quality changes that make choice less attractive Based more on quality of particular situation as opposed to quantitative decisions that are mostly about money

Role of Data in Business

Add or Drop Decisions • • • Managers must decide which product lines are continued, added, or dropped • based only on relevant costs involved in process Costs can outweigh revenues • must evaluate and analyze to determine what items to manufacture, offer as services, or stock on shelves Variable and direct fixed costs are avoidable costs

Example: Add Drop Decisions Table • Morrie’s Grocery. Ice Cream Cooler – What Should we Stock? Cost Category (in USD) Vanilla Chocolate Strawberry Neapolitan Butter Pecan Sales 1, 000 1, 200 900 700 1, 050 Variable Costs 400 720 270 490 577. 5 Contributio n Margin 600 480 630 210 472. 5 Direct Fixed Costs 100 180 90 105 Allocated Fixed Costs 150 180 135 140 157. 5 Net Income 350 120 405 -35 210

Additional Managerial Decisions • • Make or Buy decisions Sell or Process Further decisions • Example: Flower Power, Inc. : Sell or Process Further Cost Category (in USD) Course Flour Fine Flour Bread Flour Sales value after all processing $34, 000 $50, 000 $31, 000 Less: Sales value at $30, 000 the split-point $40, 000 $20, 000 Incremental revenue from further processing $4, 000 $10, 000 $11, 000 Less: cost of bagging $5, 000 Profit (loss) from bagging the flour ($1, 000) $5, 000 $6, 000

Special Order Decisions • • Special order is a one-time order that is not part of a company’s regular business operation Effective analysis must be done to insure that special order will bring additional revenue to a company

Cost-Plus or Target Costing Decisions • • Cost-plus pricing is when company figures out total cost of product and adds the profit as a “mark-up” above the cost • Target costing involves looking at what company wants for a profit, price for product, and how to cut costs to reach desired profit • • Price-makers: get to decide price Price-takers: need to price based on market average or to meet pricing market will bear Pressure is put on buyers at company to find lowest priced components in order to lower costs and create desired profit

Quick Review Navigating costs will be helpful in your job Learning how to price product may be important component of your work Instances where company was losing money with every item sold Knowing as a manager what products to keep and which processes to outsource can help make company more profitable