Relevant information for decision making Lecture Nine

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Relevant information for decision making Lecture Nine

Schedule

Learning objectives

· After this lecture, you should be able to:

· Describe a five-step sequence in the decision process.

· Differentiate relevant costs from irrelevant costs and revenues.

· Distinguish between quantitative factors and qualitative factors in decisions.

· Identify two potential problems in relevant-cost analysis.

· Describe the opportunity cost concept; explain why it is used in decision making.

· Describe the key concept in choosing which among multiple products to produce when there are capacity constraints.

· Explain why the book value of equipment is irrelevant in equipment-replacement decisions.

Information and the decision process

Concept:

Information and the decision process

Relevant costs and relevant revenues

Example Home Appliances:

Relevant costs and relevant revenues

Qualitative factors can be relevant

Concept:

Qualitative factors can be relevant

An illustration of relevance: choosing output levels

Concept:

One-off special orders

Example Huber GmbH:

One-off special orders Example Huber GmbH:

One-off special orders

Potential problems in relevant-cost analysis

Example Huber GmbH:

Potential problems in relevant-cost analysis

An illustration of relevance: choosing output levels

Example Brumaire SA:

Outsourcing and idle facilities

Example Brumaire SA:

Outsourcing and idle facilities

Example Brumaire SA:

Outsourcing and idle facilities

Opportunity costs, outsourcing and capacity constraints

Expected additional future revenues

Opportunity costs, outsourcing and capacity constraints

Example Brumaire SA:

Opportunity costs, outsourcing and capacity constraints

Overview

The lecture discusses the decision-making process in management, emphasizing the distinction between relevant and irrelevant costs and revenues. It illustrates these concepts through examples, particularly in the context of production decisions at Home Appliances and Huber GmbH.

Key Points

1Decision-making relies on a five-step process: gather information, make predictions, choose an alternative, implement the decision, and evaluate performance
2Relevant costs are future costs that differ among alternatives and are crucial for making informed decisions
3Qualitative factors can significantly impact decisions despite being non-quantifiable
4Managers must balance financial considerations with qualitative factors like employee morale when making decisions

Details

Category: Business and Finance

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