Ch 4 Summary.docx

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Accounting & Financial Management
AFM 481
Grant Russell

CHAPTER 4 RELEVANT INFORMATION FOR DECISION MAKINGRelevant Information for Decision MakingTo commit resources for a special orderTo use internal resources or to outsource someTo discontinue a product line or business segmentHow to manage limited resourcesProcess for Identifying and Analyzing Relevant InformationNeed to know the type of decision in order to determine what info is relevantCan also consider other options to achieve the same resultQuantitative information numerical information from the accounting system and outside infoUse regression to estimate fixedvariable costsFocus on comparing relevant cash flows across alternativesQualitative information factors that are not valued by numbers prior experience quality etcUse judgment to evaluate qualitative informationBefore analysis consider how the decision will affect longterm goalsNeed to prioritize issues strategic and risk considerationsTradeoffs need to be made sometimes like shortterm cash flows for stabilityProduct Line and Business Segment keepdrop DecisionsGeneral Rule for KeepDrop DecisionsDiscontinue if the incremental profit from keeping it is negativeCMrelevant fixed costsopportunity coststhe drop the business segmentSeparate that fixed and variable costsDetermine which costs are avoidable if we drop analyze the nature of the cost and its relation to the alternativesVariable costs are usually relevant fixed costs are usually unavoidableCustomer ProfitabilityCosts to maintain relationships with customersChanges in economic environment strategic goalsCustomer CMrelevant fixed costsopp coststhen drop the customer
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