Accounting

CH. 14: DECISION MAKING

> 6 STEPS TO DECISION MAKING: (pg. 589 of your textbook)

1. Determine the problem/issue

2. Specify the criterion, determine the objective

3. Identify the alternative (to make or buy, to drop or keep, to accept offer or not, to process further or sell at split-off)

4. develop a decision model

5. collect data (identify the relevant costs)

6. select an alternative (see which option will increase or decrease your net income)

> Relevant cost: cost that is pertinent to your decision

> Sunk Cost: costs that have already incurred and are irrelevant to your decision

> Differential Cost: difference in a cost item under two decision alternatives

> Opportunity Cost: potential benefit given up when the choice of one action precludes a different action

> Avoidable expenses: expenses where you can save or eliminate

> Unavoidable expenses: expenses already incurred and/or paid; expenses that will still remain no matter which decision is made

> Split-off point: the point in the joint production process where joint products are identifiable as separate products.

sales value at split off = (split off cost per unit) x (# of units)

> Separable Processing Cost: cost incurred after the split-off point

sales value if process further = (final sales value per unit - separable processing cost unit) x (# of units)

> In Joint Processing, to determine the contribution margin per machine/labor hour:

cm per machine hr = cm per unit/ machine hr per unit

machine hr per unit = machine hours used / units produced and/or sold

> Key terms to watch out for when determining costs that are: (read page 612)

* Irrelevant, sunk, unavoidable, depreciation, allocated, no resale value, untraceable (you would not include these costs when making your decision because these costs already incurred or will continue to remain whether you decide to drop/keep, make/buy, or accept/not accept offer)...