Week 009

Relevant Costing
 Meaning of Decision Making

Decision making is the process of choosing from at least two alternatives.

Short-Term Decision Making Guidelines
 Short-Term Decision Alternatives

1. Make or buy a part or a product line

2. Accept or reject a special order

3. Sell or process further a product line

4. Continue or shutdown a business segment

5. Choosing the best product combination

6. Selecting a change in profit factors

MAKE or BUY a part/product

Nature of Alternatives Description Decision Guidelines

MAKE or BUY a Should a part or product Choose the option that
part/product be manufactured (in- has the lower cost. In
sourced) or bought most cases, fixed costs are
(outsourced) from irrelevant. Consider
outside supplier? opportunity costs, if any.
ACCEPT or REJECT a special order

Nature of Alternatives Description Decision Guidelines

ACCEPT or REJECT a Should a special order Accept the order when
special order that requires a price the additional revenue
lower than the regular from the special order
selling price be accepted? exceeds additional cost,
provided the regular
market will not be
affected.
CONTINUE or SHUTDOWN a business segment

Nature of Alternatives Description Decision Guidelines

CONTINUE or Should a business Continue if segment’s
SHUTDOWN a business segment, which may be a avoidable revenue is
segment product line, a greater than its avoidable
department or a branch, costs. Otherwise, consider
be continued or shutting down the
discontinued? segment. Since allocated
fixed cost is usually
unavoidable, it is
considered irrelevant.
SELL or PROCESS FURTHER a product

Nature of Alternatives Description Decision Guidelines

SELL or PROCESS Should a product, after Process further if
FURTHER a product undergoing the joint additional revenue from
process, be sold at the processing further is
split-off point or be greater than further
processed further beyond processing costs. Joint
the split-off point? costs, since already
incurred prior to the split-
off point, are considered
sunk costs and irrelevant.
BEST PRODUCT COMBINATION (Optimization of
Scarce Resources)

Nature of Alternatives Description Decision Guidelines

BEST PRODUCT Which product(s) should Identify and measure the
COMBINATION be produced and sold constraint on the limited
(Optimization of Scarce when there is a given resource(s). Rank the
Resources) limited resources or product(s) according to
bottleneck operation? the highest contribution
margin per unit of limited
resources.
CHANGE IN PROFIT FACTORS
Nature of Alternatives Description
CHANGE IN PROFIT Should any of the profit
FACTORS factors, such as selling
price, unit sales, variable
cost, fixed cost and sales
mix be manipulated to
increase profit?
Decision Guidelines
Identify the factor to
change and the amount of
contemplated change.
Change the profit factor if
it will cause an
improvement on the
company’s over-all profit
position.