Documente Academic
Documente Profesional
Documente Cultură
Workshop on
Management Accounting for
non -finance executives
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BUSINESS DECISSION MAKING
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STEPS IN AN EFFECTIVE
DECISION MAKING PROCESS
o Decision-making experts note that managers are
more like to be effective decision makers if they
follow the general approach as detailed below.
Identify the problem
1. Generate alternative solutions
2. Evaluate and choose an alternative
3. Implement and monitor the chosen solution
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TYPE OF DECISION
o Programmed Decisions
A manager makes a programmed decision when
a situation occurs so often or is so well-
structured that it can be handled through the use
of preset decision rules.
o Non-Programmed Decisions
Decisions for which predetermined decision
rules are impractical due to novel and/or ill-
structured situations.
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DAY TO DAY BUSINESS DECISION
o We need to recognise that cost are relevant in one decision situation are not
necessarily relevant in another.
o Thus , in each decision situation the manager must examine the data at
hand and isolate the relevant costs.Otherwise , the manager runs the risk of
being misled by irrelevant data.
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Different costs for differing purposes
Example 1
o Miss Monica has a part-time job that pays her Rs.
1000 per week while attending college. She would
like to spend a week at the beach during spring break,
and her employer has agreed to give her the time off,
but without pay. The lost wages of Rs 1000 would be
an opportunity cost of taking the week off to be at the
beach.
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OPPORTUNITY COSTS
EXAMPLE - 2
o An engineer quite his job with INTEL to start his own business. The data
are:
If open an If continue
Independent as an INTEL
Business Employee
The opportunity cost of starting a new business is the Rs. 1.2 million
salary that could be received from INTEL. 17
SUNK COSTS
o A sunk cost is a cost that has already been
incurred and that cannot be changed by
any decision made now or in the future.
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CASE STUDY
SUNK COSTS
o Management of the Shaheen Chemical Company is
reviewing a research project that was initiated for the
purpose of developing a new product.
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MODULES OF DIFFERENCIAL COSTS
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CASE STUDY- 1
SPEICAL PRICING FOR SPECIAL ORDERS
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SOLUTION TO CASE STUDY- 1
SPEICAL PRICING FOR SPECIAL ORDERS
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SOLUTION TO CASE STUDY- 1
SPEICAL PRICING FOR SPECIAL ORDERS
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CASE STUDY- 2
SPEICAL PRICING FOR SPECIAL ORDERS
Polaski Company manufactures and sells a single product. Operating at capacity, the
company can produce and sell 30,000 units per year. Costs associated with this level
of production and sales are given below:
Unit Total
Direct materials ………………………………… Rs. 15 Rs. 450,000
Direct labor……………………………………… 8 240,000
Variable manufacturing overhead………………. 3 90,000
Fixed manufacturing overhead………………… 9 270,000
Variable selling expense……………………….. 4 120,000
Fixed selling expense…………………………... 6 180,000
Total cost …………………………... 45 1,350,000
Unit sales price is Rs. 50 each. Fixed manufacturing overhead is constant at Rs.
270,000 per year within the range of 25,000 through 30,000 units per year.
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CASE STUDY- 2
SPEICAL PRICING FOR SPECIAL ORDERS
Required:
Determine the impact on profits next year if this special order is accepted.
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SOLUTION TO CASE STUDY- 2
SPEICAL PRICING FOR SPECIAL ORDERS
Existing Fixed expenses are not irrelevant. However Cost of new machine is
relevant and be considered & recovered from this order.
Existing New order
Sale price 50 42
Direct Material 15 15
Direct Labour 8 8
Variable Overhead 3 3
Variable Selling 4 1
Special Machine (10000 ÷ 5000) - 2
30 29
Contribution Margin 15 13
Order be accepted at 16% discount provided it will not effect existing sales.
UTILIZATION OF SPARE CAPACITY
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CASE STUDY-3
UTILIZATION OF SPARE CAPACITY
SUPRA LTD is operating at 80% of its capacity and produce 8,000 units per month.
The budget is as follows:
Per unit -Rs Rupees
Sales 10 80,000
Variable costs:
Raw materials 3 24,000
Direct labour 2 16,000
Variable overheads 1 8,000
6 48,000
Fixed costs 3 24,000
Total Costs 9 72,000
Budgeted profit 1 8,000
There is an offer to export 1,000 units per month at a price of Rs. 8/- per unit.
c) Conclusion
Based on above,the contract should be accepted to gain from spare
capacity available as the fixed costs will remain same and have no
relevance here for decision, and therefore not to be considered for this
additional order.
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MAKE OR BUY DECSION
o A manufacturer may evaluate options to make-or-buy few
components of the product being manufactured.
Examples
o Garment factory --- fusing cutting inside or buy readymade collar
o Catering Business 33
CASE STUDY-4
MAKE OR BUY DECSION
o National Automobile Company produces an assembly used in
the production of one of its product lines.
o A decision to make in house would cost the company extra Rs. 300,000 but
that depend how much fixed cost can be saved if bought from outside.
o Therefore in case of buying from outside, the fixed costs of Rs. 500,000 will
require analysis to determine what would actually be saved if in-house
production of the assembly were discontinued.
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MAKE OR BUY DECSION
o Other factors need to be considered by the Management
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EXAMPLES
DECISION TO SHUT DOWN
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DECISION TO SHUT DOWN
o A shutdown of facilities or a project or a department does
not eliminate all costs. Some expenses like depreciation,
interest, and insurance may continue during complete
inactivity.
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DECISION TO SHUT DOWN
o Other aspect of shutdown:
1. the loss of established markets.
2. morale of other employees,
3. danger of plant obsolescence
4. training of new employees when project will restart.
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CASE STUDY-5
DECISION TO SHUT DOWN
o Delta Corporation is considering closing down its plant for one year, after
which time the demand for its product is expected to increase substantially.
o Other data
o Fixed costs of Rs18 million will continue to incur even if the plant is
closed.
o The cost of closing down operations for one year will be Rs. 14 million.
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SOLUTION TO CASE STUDY
DECISION TO SHUT DOWN
Statement of profit or loss
In case of In case of
Continuing operation Temporary closure
Rs’000 Rs’000
Sales 60,000 Fixed expenses 18,000
Variable cost of sales 40,000 Closing down costs 14,000
Contribution margin 20,000
Fixed costs 50,000
Net loss (30,000) (32,000)
CONCLUSION
The company can minimize its losses by not closing down.
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DISCONTINUE PRODUCT/ SEGMENT
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FOCUS ON CURRENT PRACTICE
A bakery distributed its products through route
salespersons, each of whom loaded a truck with an
assortment of products in the morning and spent the day
calling on customers in an assigned territory.
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DISCONTINUE PRODUCT/ SEGMENT
o Example
i. a life saving drug if discontinued may directly effect
entrance of Sales officers in doctors’ clinic, which of course
will effect sales of other products and overall image of the
company.
ii. Angised and Digixon of GLAXOWELLCOME
iii. Hospital: If one unit like X Ray not yielding profit even
then management may continue so that business of high 46
yield division like Laboratory may not be effected.
DISCONTINUE PRODUCT/ SEGMENT
o Classification of fixed cost
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CASE STUDY-6
DISCONTINUE PRODUCT/ SEGMENT
o Citi International a manufacturer of 3 consumer products, is considering dropping
SOAP, which is presently losing money as detailed below:
Fixed costs
Separable 56,000 59,000 45,000 160,000
Joint* 100,000 60,000 80,000 240,000
Total 156,000 119,000 125,000 400,000
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SOLUTION TO CASE STUDY
DISCONTINUE PRODUCT/ SEGMENT
From the previous slide, it appears that by dropping the SOAP line, Citi
International would save Rs.21,000 a year. However, incremental analysis
leads to quite a different picture:
On Discontinuing Soap:
Decrease in revenue a 300,000
Less:
Variable costs avoided 202,000
Separable fixed costs avoided 59,000
Total costs avoided b 261,000
CONCLUSION
Profit of Citi International will decrease by Rs. 39,000 if the Soap line were
dropped. Fixed cost Rs. 60,000 will continue to incur inspective of SOAP.
(60,000 – 21,000 = 39,000 Loss)
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SOLUTION TO CASE STUDY
DISCONTINUE PRODUCT/ SEGMENT
Alternate working - P/L A/c after discontinuing Soap
Conclusion :
It is advisable to continue Soap line since overall profit is declining by
Rs 39,000
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DISCONTINUE PRODUCT/ SEGMENT
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CASE STUDY-7
RELEVANT COSTS
A merchandising company has two departments, A and B. Monthly income statement
for the company is as follows for a recent month :
Department
Total A B
Sales …………………………Rs. 4,000,000 Rs. 3,000,000 Rs. 1,000,000
Less variable expenses……… 1,300,000 900,000 400,000
Contribution margin …..…… 2,700,000 2,100,000 600,000
Less fixed expenses ………… 2,200,000 1,400,000 800,000
Net operating income (loss) …Rs. 500,000 Rs. 700,000 Rs. (200,000)
A study indicates that Rs. 340,000 of the fixed expenses being charged to Department B
are sunk costs or allocated costs that will continue even if B is dropped. In addition, the
elimination of Department B will result in a 10% decrease in the sales of Department A.
Required: What will be the effect on the net operating income of the company as a
whole if Department B is dropped ? 52
SOLUTION TO CASE STUDY
RELEVANT COSTS
350,000
CASE STUDY
PRODUCT PROCESS EFFICIENCY
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ADDITIONAL CONTRACT PRICING
LIMITING FACTORS
CASE STUDY-8
Sitara Ltd manufactures special purpose gauges to customers’
specifications. The highly skilled labour force is always
working to full capacity. The budget for the next year shows
following data :
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CASE STUDY
ADDITIONAL CONTRACT PRICING
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CASE STUDY-9
ADDITIONAL CONTRACT PRICING
Rs in 000’s
BUDGETED P/L A/C
Sales 540
Direct materials 40
Direct wages 3,200 hours @ Rs. 93.75 300
Contribution margin 200
Fixed overhead, 100
Profit 100
An enquiry is received from Lanka Ltd for a gauge which would use Rs. 600 of direct
materials and 40 labour hours.
Q-1 What is the minimum price to quote to Lanka Ltd when maximum work
hours are 3200.
Q-2 Would the minimum price be different if spare capacity were available but
materials were subject to a quota of Rs. 40,000 per year?
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SOLUTION TO CASE STUDY
ADDITIONAL CONTRACT PRICING
Rs.
Materials 600
Wages 40 hours @ 93.75 3,750
4,350
Add: Contribution 40 hours @ 62.5 2,500
To Quote Contract price (minimum) 6,850
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SOLUTION TO CASE STUDY
ADDITIONAL CONTRACT PRICING
o Example
o Textile: Gray Cloth – Dying – Printing
o Mining: Oil - Gas
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CASE STUDY-10
FURTHER PROCESSING DECISION
Product
A B C
Cost of further processing Rs. 5.00 3.00 9.00
Selling price:
o Before further processing 11.00 14.00 13.00
o After further processing 15.00 19.00 20.00
Monthly out put (in liters) 100.00 50.00 80.00
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SOLUTION TO CASE STUDY
FURTHER PROCESSING DECISION
Product
A B C
Selling price:
o Before further processing 11.00 14.00 13.00
o After further processing 15.00 19.00 20.00
Incremental revenue on processing further 4.00 5.00 7.00
Further processing cost (5.00) (3.00) (9.00)
Incremental contribution (1.00) + 2.00 (2.00)
The above calculation shows that the further processing of product B is the only further
processing activity which leads to an increase in contribution.
CONCLUSION
Shezad Ltd may further process product B only, and sell products A and C without further
processing them.
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CASE STUDY – 11
FURTHER PROCESSING DECISION
Required:
Advise whether product X be processed further or sold at the split-
off point?
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SOLUTION TO CASE STUDY
FURTHER PROCESSING DECISION
CONCLUSION
Product X be processed further
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CONCEPT REVIEW EXERCISE
Fill in the blank from choices given.
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