Chapter 13 - Short Run Decision Making Relevant Costing

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11 Apr 2012
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Wednesday March 28th, 2012
Chapter 13
Short Run Decision Making: Relevant Costing
Short Run Decision Making:
-short run decision making consists of choosing among alternatives with an immediate or limited end in
view
-accepting a special order for less than the normal selling to utilize idle capacity and to increase this
year’s profit is an example
-some decisions tend to be short run in nature however it should be emphasized that short run decisions
often have long run consequences
-short run decisions are often small scale actions that serve a larger purpose
The Decision Making Model:
-a decision making model is specific set of procedures that produces a decision, can be used to structure
that decision maker’s thinking and to organize the information to make a good decision
-following is an outline of one decision making model
1. Recognize and define the problem
2. Identify alternatives as possible solutions to the problem; eliminate alternatives that clearly are
not feasible
3. Identify the costs and benefits associated with each feasible alternative, classify costs and
benefits as relevant or irrelevant and eliminate irrelevant ones from consideration
4. Estimate the relevant costs and benefits for each alternative
5. Assess qualitative factors
6. Make the decision by selecting the alternatives with the greatest overall net benefit
-decision making model has 6 steps
-you can break the steps if you find that too be useful
Example: you can use a 3 step model:
1. Identify the decision
2. Identify alternatives and their associated relevant costs
3. Make the decision
Some Common Relevant Cost Applications:
-relevant costing is of values in solving many different types of problems
-traditionally these applications include decisions to make or buy a component, to keep or drop a
segment or product line, to accept a special order at less than the usual price and to further process
joint products or sell them at the split off point
Make or Buy Decisions:
-managers often are faced with the decision of whether to make a particular product or service or to
buy it from an outside supplier
-a manufacturer may need to consider whether to make or buy components used in manufacturing
-manager of a service firm may need to decide whether to provide a service in house or to outsource it
-many services traditionally performed within the company such as payroll processing, individual income
tax form preparation or human resources are now being outsources
-make or buy decisions are those decisions involving a choice between internal and external production
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