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30 Cards in this Set

  • Front
  • Back
The six steps in the decison making process
Clarify the decision problem
Specify the criterion upon which the decision will be made
Identify the alternatives
Develop a decision modle that brings together the criterion, the constraints and the alternatives
Collect the data
Select an alternative
Information that is useful in decision making must be
relevant( pertinent to the decision problem)
accurate (precise)
and timely (arrive in time for the decision to be made
COmpanies will occasionally trade off
accuracy for timeliness
Relevant information involves costs and benefits that
1. differ among the alternatives being considered and
2. are future oriented

Both guidelines must be met
Sunk costs
are past costs that have already been incurred. Such costs are irrelevant in decision making because the amounts cannot be changed by any of the alternatives under review.
Differential Cost
is the net difference in cost between two alternatives
opportunity cost
is the cost of a forgone alternative
Special orders
A manager considers an order at a special price
COst Behavior- assume that fixed costs remain fixed, only variable costs change
Qualitative considerations- reaction of present customers at special price, regulations that guard against price discrimination
Idle capacity- all or part of the order must be filled through regular paroduct supply id there is insufficient idle production
Requires carefl consideration of fixed costs. The total cost per unit of a product or service includes a untitized protion of fixed cost, a cost that may contine even if the item or service is purchased elsewhere at a lower price
Add or drop a service, product or department
determination if fixed costs are avoidable or unavoidable

In many cases fixed costs are not avoidable, particularly allocated common costs

The contirubution margin lost from the activity to be dropped must also be considered
joint production process
results in the manufacture of two or more products
split-off point
point where joint products become identifiable from each other
correct decision is made in the joint production process by
comparing the seperable cost incurred against the amouint of increased sales revenue
Allocation of limited resources
desisions may involve the use of limited labor hours, limited materials and limitied machine time
weighing an alternative with its probability of occurrence. Multiplying the alternative by a probability and then summing the results will yield the expected value
Several hints in decision making
ignore sunk costs
Beware of unitized fixed costs
Beware of allocated fixed costs, identify the avoidable costs
Pay special attention to identifying and including opportunity costs in the analysis of alternatives
a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a given period of time
Budget functions
Communicating anf coordinating the plans and views or numerous managers within an organization
Allocating limited resources among various programs/projects
Controlling operations by servinv as a standard against which actual results can be compared
Evaluating performance
MAster budget
a comprehensive profit plan that covers alkl phases of an organization's operations
Capital budget
focuses on the acquisition of long-term assets
Rolling budgets
continuously updated by adding a new time period
The master budget begins with a
sales forcast
activity based budgeting
forecasts are made of products and services to be produced, and customers to be served. Next the necessary activities are determined. Finally the resources required for these activited are determined and quantified
financial planning model
a set of mathematical relationships that express the interactions among a firm's operational, financial and environmental events
employees throughout an organization submit and retrieve budget information via the internet
zero-based budgeting approach
to receive funding for an upcoming period, each activity must be justified in terms of its continued usefulness to the organization
approach whereby an intitial base package is given to a unit. This package would include minimal funding below which the unit would not be a viable entity
participative budgeting
invloves employee participation in the budget-preparation process at various levels of the organizational hierarchy
economic order quantity
formula is useful in determining the size of inventroy orders, or production runs in manufacturing setting, that will mnimize the total cost of an inventory policy
lead time
is sueful in deciding when to order. Lead time or the time that elapses between order placement and order arrival is based on average usage and how long it takes to receive an order from a supplier