Information for tactical decisions

The management accountant’s role in decision making

Characteristics of relevant information

Accept or reject a special order

Make or buy a product

Outsourcing decisions

Add or delete a product or department

Joint products: sell or process further

Implications of ABC analysis for decisions

Incentives for decision makers

Pitfalls to avoid when using accounting data for decisions

 

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Chapter 19 Information for tactical decisions 19-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineThe management accountant’s role in decision makingCharacteristics of relevant informationAccept or reject a special orderMake or buy a productOutsourcing decisionsAdd or delete a product or departmentJoint products: sell or process furtherImplications of ABC analysis for decisionsIncentives for decision makersPitfalls to avoid when using accounting data for decisions19-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe management accountant’s role in decision makingTo provide relevant information to managers and teams who make the decisionsTactical decisionsDo not require significant or permanent resource commitmentsCan be changed or reversed quicklyLong-term decisionsTend to be more strategic in natureMay involve increases or decreases in capacity-related resourcesMore difficult to reverse and effects may extend over longer time periods19-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithA model of the decision-making processClarify the problemIdentify alternative courses of actionCollect relevant cost and benefitsCompare the costs and benefits of each possible course of actionSelect a course of action19-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCharacteristics of relevant informationDifferent under competing courses of actionMay include opportunity costsThe potential benefit given up when one course of action is chosen over anotherRelates to the futureSunk costs are ignoredCosts that have already been incurred and are irrelevant to any future decisionsPrediction of future costs may be based on past data19-5(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCharacteristics of relevant information (cont.)Timeliness versus accuracyInformation available in time to be used in the decision-making processAs accuracy increases, timeliness may decreaseQuantitative or qualitativeQuantitative information can be expressed in numeric terms, such as dollarsQualitative information cannot be expressed easily in numerical terms19-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe importance of providing only relevant informationGenerating information is a costly processSupplying irrelevant data can result in a waste of managerial resourcesInformation overload decreases the effectiveness of decision making19-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInformation for unique versus repetitive decisionsUnique decisionsArise infrequently or only onceRelevant information will often be found both inside and outside the organisationRelevant information is harder to generateRepetitive decisionsMade at regular or irregular intervalsMay draw on a large amount of historical dataRelevant information is readily available19-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInformation for decisions: terminologyIncremental revenueThe additional revenue that will be gained as a result of choosing one course of action over anotherIncremental costsThe additional costs that arise from choosing one course of action over another19-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Information for decisions: terminology (cont.)Avoidable costs Costs that will not be incurred in the future if a particular decision is madeUnavoidable costsCosts that will continue to be incurred no matter which decision alternative is chosenIrrelevant to the decision19-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithAccept or reject a special order Whether or not to supply a customer with a single, one-off order for goods or services, at a special price Spare capacity occurs where equipment, labour or other inputs to production are not being utilised and, hence, are available for other purposesIf incremental revenues are greater than incremental costs, the order should be accepted, on financial groundsAllocated fixed costs should not be includedAssumes that there are no alternative uses for the spare resources19-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Accept or reject a special order (cont.)If there is no spare capacity The analysis should take account of opportunity costs associated with the use of the limited capacityIf the decision is not a one-off decisionPricing may need to be reviewed to cover facility costsIf capacity is limited, then it may need to be increased to ensure that all profitable business can be accommodatedStrategic issuesLong-term strategic issues may include whether the decision to accept the special order will impact on the business’ reputation or relationships with existing customers19-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithMake or buy a productInvolves the choice of whether to produce a product, or purchase it from an external supplierConsider avoidable versus unavoidable costsOpportunity costs are often relevantLost profits from using capacity to make the productStrategic issues may includeQuality of the purchased productDelivery responsiveness, technical capabilities, labour relations and financial stability of the supplierAbility of the supplier to respect confidential information 19-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutsourcing decisionsOutsourcing occurs when part of a manufacturing process, or another function normally undertaken within an organisation, is contracted to an outside businessTends to be a long-term decision rather than a tactical “make or buy” decisionDifficult and costly to reverse19-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithAdd or delete a product, service or departmentConsider which costs and benefits will change if the decision is takenHas long-term implicationsConventional accounting data that contains cost allocations should be treated with careStrategic issuesIf we delete a product, will this affect sales of other products? Will we loose customers? Will it impact capacity? Deleting a department may impact on employee morale19-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithJoint products: sell or process furtherJoint products Two or more products produced simultaneously from the one production processCannot be separated prior to split-offSplit-off pointThe stage in the production process when the joint products are identifiable as separate productsJoint costAll manufacturing costs incurred in the production of joint productsRelative sales method A method of allocating joint cost to joint products in proportion to their sales value at the split-off point19-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithImplications of activity-based cost analysis for decisionsIdentification of relevant costs, incremental costs, opportunity costs, sunk costs and avoidable costs Costs may be more accurately assigned to products or departmentsLeads to the identification of precise cost implications of various decision alternatives19-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith19-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithIncentives for decision makersManagers typically make decisions that will maximise their reported performance and rewardsCost systems may be designed explicitly to encourage certain biases in decision makingTo encourage managers and employees to make certain decisions, systems must be designed with this in mind19-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithPitfalls to avoid in using accounting data for decisionsIgnore sunk costsBeware of unitised fixed costs in decision makingBeware of allocated fixed costs; identify the avoidable costsPay special attention to identifying and including opportunity costs in a decision analysis 19-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryTactical decisions do not require significant changes in capacity and can be changed if better opportunities ariseRelevant information will include quantitative and qualitative information, as well as strategic issues In decision analysis, incremental revenues and costs are usually the focus, and in some cases so are avoidable costsIdentifying whether there is spare capacity is important in special orders and make or buy decisions, as opportunity costs become relevant where there is no spare capacity19-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Summary (cont.)Adding or deleting a product/department involves consideration of avoidable and unavoidable costsProcessing joint products further requires consideration of incremental revenue and costsABC system may provide more accurate information than costs generated from conventional costing systemsManagement incentives can sometimes distort the collection and analysis of information in decisionsAccounting data should be used carefully in decision analysis as it can be problematic19-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith

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