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20/01/2014

Chapter 19 Information for tactical decisions Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a
Chapter 19
Information for tactical decisions
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-1
Outline • The management accountant’s role in decision making • • • • • • •
Outline
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
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-2
The management accountant’s role in decision making • To provide relevant information to managers and teams
The management accountant’s
role in decision making
To provide relevant information to managers and
teams who make the decisions
Tactical decisions
– Do not require significant or permanent resource
commitments
– Can be changed or reversed quickly
Long-term decisions
– Tend to be more strategic in nature
– May involve increases or decreases in capacity-related
resources
– More difficult to reverse and effects may extend over longer
time periods
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-3

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A model of the decision-making process 1. Clarify the problem 2. Identify alternative courses of action
A model of the decision-making
process
1.
Clarify the problem
2.
Identify alternative courses of action
3.
Collect relevant cost and benefits
4.
Compare the costs and benefits of each possible
course of action
5.
Select a course of action
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-4
Characteristics of relevant information • Different under competing courses of action – May include opportunity costs
Characteristics of relevant
information
Different under competing courses of action
– May include opportunity costs
The potential benefit given up when one course of action is
chosen over another
Relates to the future
Sunk costs are ignored
Costs that have already been incurred and are irrelevant to
any future decisions
– Prediction of future costs may be based on past data
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-5
Characteristics of relevant information (cont.) • Timeliness versus accuracy – Information available in time to be
Characteristics of relevant
information (cont.)
Timeliness versus accuracy
– Information available in time to be used in the decision-
making process
– As accuracy increases, timeliness may decrease
Quantitative or qualitative
– Quantitative information can be expressed in numeric
terms, such as dollars
– Qualitative information cannot be expressed easily in
numerical terms
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-6

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The importance of providing only relevant information • Generating information is a costly process • Supplying
The importance of providing only
relevant information
Generating information is a costly process
Supplying irrelevant data can result in a waste of
managerial resources
Information overload decreases the effectiveness
of decision making
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-7
Information for unique versus repetitive decisions • Unique decisions – Arise infrequently or only once –
Information for unique versus
repetitive decisions
Unique decisions
– Arise infrequently or only once
– Relevant information will often be found both inside and
outside the organisation
– Relevant information is harder to generate
Repetitive decisions
– Made at regular or irregular intervals
– May draw on a large amount of historical data
– Relevant information is readily available
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-8
Information for decisions: terminology • Incremental revenue – The additional revenue that will be gained as
Information for decisions:
terminology
Incremental revenue
– The additional revenue that will be gained as a result of
choosing one course of action over another
Incremental costs
– The additional costs that arise from choosing one course
of action over another
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-9

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Information for decisions: terminology (cont.) • Avoidable costs – Costs that will not be incurred in
Information for decisions:
terminology (cont.)
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
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-10
Accept or reject a special order • Whether or not to supply a customer with a
Accept 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 purposes
– If incremental revenues are greater than incremental
costs, the order should be accepted, on financial
grounds
– Allocated fixed costs should not be included
– Assumes that there are no alternative uses for the spare
resources
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-11
Accept or reject a special order (cont.) • If there is no spare capacity – The
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 capacity
If the decision is not a one-off decision
– Pricing may need to be reviewed to cover facility costs
– If capacity is limited, then it may need to be increased to
ensure that all profitable business can be accommodated
Strategic issues
– Long-term strategic issues may include whether the decision
to accept the special order will impact on the business’
reputation or relationships with existing customers
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-12

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Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-13
Make or buy a product • Involves the choice of whether to produce a product, or
Make or buy a product
Involves the choice of whether to produce a
product, or purchase it from an external supplier
Consider avoidable versus unavoidable costs
Opportunity costs are often relevant
– Lost profits from using capacity to make the product
Strategic issues may include
– Quality of the purchased product
– Delivery responsiveness, technical capabilities, labour
relations and financial stability of the supplier
– Ability of the supplier to respect confidential information
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-14
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-15

20/01/2014

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-16
Outsourcing decisions • Outsourcing occurs when part of a manufacturing process, or another function normally undertaken
Outsourcing decisions
Outsourcing occurs when part of a manufacturing
process, or another function normally undertaken
within an organisation, is contracted to an outside
business
Tends to be a long-term decision rather than a
tactical “make or buy” decision
Difficult and costly to reverse
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-17
Add or delete a product, service or department • Consider which costs and benefits will change
Add or delete a product, service
or department
Consider which costs and benefits will change if
the decision is taken
Has long-term implications
Conventional accounting data that contains cost
allocations should be treated with care
Strategic issues
– If 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 morale
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-18

20/01/2014

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-19
Joint products: sell or process further • Joint products – Two or more products produced simultaneously
Joint products: sell or process
further
Joint products
– Two or more products produced simultaneously from the one
production process
– Cannot be separated prior to split-off
Split-off point
– The stage in the production process when the joint products
are identifiable as separate products
Joint cost
– All manufacturing costs incurred in the production of joint
products
Relative sales method
– A method of allocating joint cost to joint products in proportion
to their sales value at the split-off point
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-20
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-21

20/01/2014

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-22
Implications of activity-based cost analysis for decisions • Identification of relevant costs, incremental costs, opportunity costs,
Implications of activity-based
cost analysis for decisions
Identification of relevant costs, incremental costs,
opportunity costs, sunk costs and avoidable costs
Costs may be more accurately assigned to
products or departments
Leads to the identification of precise cost
implications of various decision alternatives
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-23
Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-24

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Incentives for decision makers • Managers typically make decisions that will maximise their reported performance and
Incentives for decision makers
Managers typically make decisions that will
maximise their reported performance and rewards
Cost systems may be designed explicitly to
encourage certain biases in decision making
To encourage managers and employees to make
certain decisions, systems must be designed with
this in mind
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-25
Pitfalls to avoid in using accounting data for decisions 1. Ignore sunk costs 2. Beware of
Pitfalls to avoid in using
accounting data for decisions
1.
Ignore sunk costs
2.
Beware of unitised fixed costs in decision making
3.
Beware of allocated fixed costs; identify the
avoidable costs
4.
Pay special attention to identifying and including
opportunity costs in a decision analysis
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-26
Summary • Tactical decisions do not require significant changes in capacity and can be changed if
Summary
Tactical decisions do not require significant
changes in capacity and can be changed if better
opportunities arise
Relevant 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 costs
Identifying 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 capacity
(cont.)
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-27
Summary (cont.) • Adding or deleting a product/department involves consideration of avoidable and unavoidable costs •
Summary (cont.)
Adding or deleting a product/department involves
consideration of avoidable and unavoidable costs
Processing joint products further requires
consideration of incremental revenue and costs
ABC system may provide more accurate
information than costs generated from
conventional costing systems
Management incentives can sometimes distort the
collection and analysis of information in decisions
Accounting data should be used carefully in
decision analysis as it can be problematic
Copyright  2009 McGraw-Hill Australia Pty Ltd
PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
19-28

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