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Decisions Involving
Alternative Choices
Introduction
Managerial decision-making is the
process of choosing among alternative
courses of action.
The manager chooses that course of
action which he considers as the most
effective means of achieving goals and
solving problems.
All decisions are futuristic in nature,
involving a forecast of what
management thinks is likely to occur.
Management Accounting
By Paresh Shah
Oxford University Press
Steps In Decision-making
Defining the Problem
Perceptive analysis and insight may be
required to articulate the problem. The real
problem may have to be distinguished from
the apparent one.
Steps In Decision-making
Evaluating the alternatives
Each solution may have several advantages
and disadvantages. These have to be weighed
and balanced for judging its overall desirability.
Arriving at a decision
Once the alternative courses of action are
evaluated in terms of their measurable and
non-measurable effects, the decision maker
will be in a position to select one of the
alternatives.
Management Accounting
By Paresh Shah
Oxford University Press
Characteristics Of Relevant
Costs For Decision-making
They are expected future costs
If the same costs are incurred for both the
alternatives, then they are not relevant.
The difference between the amounts of
the two costs is called differential cost or
incremental cost.
Differential Costs = Cost of one
alternative
Cost of other
alternative
Management Accounting
By Paresh Shah
Oxford University Press
Management Accounting
By Paresh Shah
Oxford University Press
Application Of
Decision-making Concepts
Differential cost analysis
Incremental Profit
Incremental revenue
Incremental costs
Management Accounting
By Paresh Shah
Oxford University Press
Practical Applications
Of Marginal Costing
Evaluation of performance
Profit planning
Fixation of selling price
Make or buy decisions
Optimizing product mix
CVP analysis in multi-product situations
Decision to accept a special order
Decision to continue or drop a product line
Decision regarding equipment replacement
Decision regarding construction of facilities
Decision regarding selling or further processing
Cost control
Flexible budget preparation
Management Accounting
By Paresh Shah
Oxford University Press