Professional Documents
Culture Documents
Long-term decisions
More strategic
Movements in capacity-related resources
More difficult to reverse
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-3
A model of the decision-
making process
The seven steps involved are:
1. Clarify the problem
2. Specify the decision criterion
3. Identify alternative courses of action
4. Collect information about relevant costs and
benefits
5. Compare the costs and benefits of each
alternative course of action
6. Select a course of action
7. Evaluate the effectiveness of the decision(cont.)
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-4
A model of the decision-making
process (cont.)
Repetitive decisions
Made at regular or irregular intervals
May draw on a large amount of historical data
Relevant information should be readily available
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-9
Identifying relevant costs and
benefits: terminology
Incremental revenue
Results from choosing one course of action over
another
Incremental costs
Costs that arise from choosing one course of action
over another
Out-of-pocket costs
incurred if a particular course of action is selected
Sunk costs
Already incurred and irrelevant for future decisions
(cont.)
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-10
Identifying relevant costs and
benefits: terminology (cont.)
Opportunity costs
The potential benefit given up when the choice of
one action precludes a different action
Avoidable costs
Costs that will not be incurred in the future if a
particular decision is made
Unavoidable costs
Costs that will continue to be incurred no matter
which decision alternative is chosen
Irrelevant to the decision
(cont.)
(cont.)
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-19
Add or delete a product,
service or department (cont.)
(cont.)
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 19-20
Add or delete a product, service or department (cont.)
By-product
Split-off point
Joint cost
(cont.)