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Short-Term Decision Making

This document discusses short-term decision making. It defines short-term decisions as non-routine cases and outlines a 5-step decision making process: 1) identify the need for a decision, 2) identify alternatives, 3) determine consequences, 4) evaluate alternatives, and 5) select and implement the best alternative. Managers should consider both quantitative and qualitative factors in decisions. The document also discusses approaches to decision making, defines relevant costs and sunk costs, and provides examples of common short-term decisions faced by businesses.

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104 views25 pages

Short-Term Decision Making

This document discusses short-term decision making. It defines short-term decisions as non-routine cases and outlines a 5-step decision making process: 1) identify the need for a decision, 2) identify alternatives, 3) determine consequences, 4) evaluate alternatives, and 5) select and implement the best alternative. Managers should consider both quantitative and qualitative factors in decisions. The document also discusses approaches to decision making, defines relevant costs and sunk costs, and provides examples of common short-term decisions faced by businesses.

Uploaded by

adulusman501
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Short-Term Decision Making

Learning Objectives

 Be able to differentiate sunk costs and relevant costs


 Choose the best course of action among the alternatives provided
Decision Making

 Making a choice from at least two alternative


 Can be classified according to scope of the effect of decision:
 Short-term non-routine cases
 Long-term cases
Decision Making Process

1. Identification of necessity to make a decision


2. Identification of alternatives or decision choices
3. Determination of possible results and consequences of alternatives
4. Evaluation of alternatives
5. Selection of best alternative and implementation
Factors to Consider

 Quantitative Factors- Those that can easily be expressed in terms of money or


other units of measure

 Qualitative Factors- Those that cannot easily and accurately expressed in


terms of money or other units of measure
Approaches in Decision Making
Two approaches are used in decision making
 Total Approach
 Total revenues and costs are determined for each alternative, and the results
are compared to serve as bases for making decision
 Advantage is primarily looking at the expected performance of the alternatives,
but it includes some costs that are common to ALL alternatives
 Differential Approach
 Involves finding the most profitable alternative by analyzing ONLY the relevant
revenues and costs
 Advantage is considering only those items that is mutually exclusive to
alternatives, but may lead to forgetting other costs that are common to all
alternatives.
Cost Definition

 Relevant Revenues and Costs- Future revenues/costs that are expected to be


different under each alternative
 Differential Cost- the increments or decrements in total costs between two
alternatives
 Avoidable Costs- costs that will be saved or those that will not be incurred if a
certain decision is made
 Sunk Costs- refer to non-recoverable costs incurred in the past
 Opportunity Costs- benefit lost by taking one action as opposed to another
Company A is currently using Raw Material B which costs ₱5,000/kg as direct
materials for its products. However, the marketing department suggested the use
of cheaper Raw Material C, which is ₱3,000/kg. The Company’s is yet to
determine whether the cheaper Raw Material will affect the quality of the
Company’s products. The Company had already consumed 60kgs of Raw Material
B during the month. The Company is still in the process of deciding which Raw
Material is to be purchased for the remaining 40kgs.

Identify the following:


1. Relevant Costs
2. Differential Cost
3. Avoidable Cost
4. Sunk Costs
5. Opportunity Costs
Short-Term Decision Making
Short-Term Decision Making
Make or Buy Decision
Make or Buy
Accept or Reject a Special Order
Accept or Reject a Special Order
Continue or Drop a Division or Segment
Continue or Drop a Division or Segment
Sell As Is or Process Further
Sell As Is or Process Further
Sell Now or Sell Later
Sell Now or Sell Later
Replace or Retain an Old Asset
Replace or Retain an Old Asset
Scrap or Rework Defective Unit
Scrap or Rework Defective Unit
Questions?

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