I.

OVERVIEW :

This paper outlines essential managerial decision-making scenarios that involve

analyzing costs and operational factors to determine the best course of action. One of the

primary areas it discusses is the make-or-buy decision, which involves determining whether to

produce components internally or outsource them. This decision hinges on factors such as

production costs, overhead expenses, and the reliability of external suppliers. It also delves into

special order decisions, which assess whether accepting one-time orders is profitable. These

decisions often take advantage of unused production capacity and are evaluated based on

incremental cost analysis. Another crucial area is the continue-or-drop product line decision,

where companies weigh the financial and operational impact of discontinuing a product. This

process considers factors such as how the product complements the rest of the company’s

offerings, its effect on employee morale, and how discontinuation might free up resources for

other uses. Furthermore, the equipment replacement decisions, which focus on the cost savings

and improved efficiency that can result from replacing outdated machinery. Next one is the

construction of facilities decision, looks at whether it’s more beneficial for an organization to

build its own infrastructure or rely on external sources for production. And lastly, sell or process

further decisions, analyze whether a product should be sold as is or further refined to increase

its market value. This decision depends on factors such as the company’s technical capabilities,

the additional costs involved, and market conditions. Throughout, this emphasizes the

importance of considering relevant costs, opportunity costs, and the long- and short-term

implications of these choices. By addressing these factors, it provides a structured framework

for organizations to allocate resources efficiently and achieve their strategic goals.

1
 II. Learning Objectives :

• Nature of Managerial Decision Making

• Characteristics of Costs for Decision-Making

• Alternative Choice Decisions

Under it we will discuss:

➢ Decision to make or buy

➢ Decision to accept a special order

➢ Decision to continue or drop a product line

➢ Decision regarding equipment replacement

➢ Decision regarding construction of facilities

➢ Decision regarding selling or further processing and other aspects

III. Learning Content

Nature of Managerial Decision Making

Cost accounting systems provide information to managers who make decisions. The

decision makers can improve their ability to make decisions and their general understanding of

the decision process by learning new techniques applicable to specific situations. Using

systematic approaches to decision making avoids ad hoc methods that often neglect relevant

considerations, increasing the likelihood of better decisions.

Decision making is an integral part of all management functions like planning,

organizing, coordination; and control. Planning for the future, organizing, coordinating and

2
controlling those activities to achieve these plans are the major functions of a manager. All the

decision making to be done by the managers involves an element of risk as it can have a great

impact on the future of an organization. There are also routine decisions which may not take

away much time of a manager. But the real ability of a manager is tested when there is high

risk involved in decisions.

Managerial decision-making is the process of choosing among alternative courses of

action. A manager chooses that course of action that he considers to be the most effective

considering the means at his disposal for achieving goals and solving problems. Decision-

making is an integral part of all management functions like planning, controlling, organizing

and coordinating.

In the process of making decisions, managers end up with various alternatives. The real

test lies in their ability to pick up the best alternative course of action.

Steps in Decision Making

The various steps involved in managerial decision-making can be classified as:

1. Defining the problem

2. Developing alternative solutions

3. Evaluating the alternatives

4. Arriving at an appropriate decision

Defining the problem refers to identifying the problem. Identifying the problem may

not always be an easy task. A manager should possess such features as perceptive analysis and

insight to identify the problem accurately.

3
 While developing the alternative solutions, one should consider the company’s goals

and objectives. The selection of various alternatives requires a sound understanding of the

factors causing the problem and requires imaginative thinking about ways and means that are

required to solve it. While selecting the various options, one should eliminate those which are

clearly unattractive and narrow down the choice to a few.

Once the options are considered, the next step is to evaluate among the selected

alternatives. The advantages and disadvantages of each alternative should be evaluated. A final

decision is arrived at after evaluating the alternatives.

Characteristics of Costs for Decision-Making

Relevant costs

"Are those future costs and revenues that will be changed by a decision"

"Historical costs are relevant to the decision only if they are expected to continue

in the future"

"If the same costs are incurred for both the alternatives, then they are not relevant"

There are certain costs that are more relevant to decision making than others.

The identification of relevant costs is necessary in the process of appropriate

decision- making. It is assumed that no costs are relevant unless they pertain to the

future. After the selection of two alternatives, if it is found that the same costs are

to be incurred for both the alternatives, then they become irrelevant.

Alternative choice decision

4
 "Alternative choice decisions involve situations with two or more courses of action

from which the decision maker must select the best alternative"

Multiple-alternative choice decision - Decisions involving more than two

alternatives

Objective is to select the best of the available alternatives

The selection of the best alternative is primarily based on judgment with little or no

analytical data. Other factors involve systematic decision models. In most business

decisions, some accounting data are useful in reaching a decision, and cost data are

particularly useful in analyzing many alternative choice decisions.

Decision To Make Or Buy

When is make and buy decision is required

• A firm that is presently buying a product or part from outside may consider to

manufacture that product or part in the firm itself.

• A firm manufacturing a product in its factory and may be considering purchasing the

same from an outside supplier.

5
 A company manufactures a wide range of parts and also buys many parts from external

suppliers. One of the part No. 101 The monthly requirement of this part is 1,000 units and

the standard cost for one unit is: Rs

Materials manager suggested that the company could save money if it was purchased from an

outside supplier willing to supply the quantity required by Zenith at Rs.100 per unit. He

estimated that if the part is bought from outside, the fixed clerical cost would increase that if

part is bought from outside. The fixed clerical cost would increase by Rs.1,500 and the variable

6
handling cost would be Rs. 5 per unit. The plant manager reported that if the manufacture of

Part No.101 were discontinued there would be no change in fixed manufacturing overheads.

Other aspects that should be taken into account while making a decision of this kind are:

➢ Value of facilities that would be released if the part is not manufactured,

➢ Reliability of the external supplier,

➢ Control over the quality of the external supplier,

➢ Difficulty in retrenching or using labor for some other purpose if manufacture of the

part is discontinued.

Decisions To Accept A Special Order

• Special orders or one-time orders often have different characteristics than recurring

orders.

7
 • Order should be evaluated based on costs relevant to the situation and the goals of the

company.

• Other factors influencing special-order pricing decisions may be; effect on regular

customers and special order customers turning regular customers.

Crisp chocolate company is Operating at only of 60% of capacity due to slow holiday season

sales. A social service organization approaches the company with a proposal that company

produce 10,000 chocolate bars of 25 gms to be sold for Rs.1 by members of the social service

organization to raise money for poor students. The proposal call for a Rs.0.55 purchase price

per bar for the social service concern. The chocolate bar can be produced with the firm’s current

excess capacity. The firm’s chief accountant prepares the following cost estimates associated

with the production and sale of the chocolate bars.

8
Decision to Continue or Drop a Product line

Decision concerning the discontinuation of a product should consider;

Complementary/competitive nature of the products of the company

Impact on the image of the company

Effect on the motivation of the employees

Value of resources released on discontinuation

Decision Regarding Equipment Replacement

Important decision involving alternative choices is whether or not to buy new capital

equipment.

Economic advantage offered by the investment is the realization of operating cost savings

which are translated into increased net profit

Decision Regarding Construction of facilities

- Decision to replace or addition to the equipment has been taken, the company might be in a

9
position to construct its own facilities apart from the possibility of getting the same thing done

from outside sources.

-While taking this decision, no attempt must be made

to spread total manufacturing overheads over regular business operations as well as the new

project

Decision Regarding Selling or Further Processing

-Whether an item is to be sold at an intermediate stage or whether it should be processed further

and sold as a finished product is another decision that managers are forced to make.

-Where further processing entails additional facilities, a capital investment decision is required,

but if facilities and spare capacity already exist,

Decision Regarding Selling or Further Processing

OTHER ASPECTS

-Technical know-how and skill of the firm to process the product further

-Additional working capital requirements as a consequence of further processing

-Flexibility in hiring and retrenching people

- Marketing set-up for distributing the finished product

Decisions Facing Management

-Role of cost in decision making

-Relevant costs

10
-Contribution approach in decision making

-Relevance and cost behavior

-Short-term and long-term implications of decisions

-Opportunity costs in Decision making

*Your Client has recently leased facilities for manufacturing a new product. Based on studies

made by his staff, the following data have been made available to you:

IV. Summary

Managerial decision-making relies heavily on cost accounting to provide essential data that

facilitates systematic and informed decisions, minimizing reliance on ad hoc methods. The

decision-making process involves defining problems, evaluating alternatives, and making

choices that balance risks and outcomes. Key considerations include identifying relevant

costs that directly influence decision outcomes, while irrelevant costs are disregarded.

Various decision scenarios, such as make-or-buy, special orders, product line continuation,

equipment replacement, facility construction, and further processing decisions, illustrate the

importance of comparing costs and benefits to achieve optimal outcomes. Managers must

also factor in cost behavior, opportunity costs, and the implications of decisions on

profitability and operational efficiency.

11
Ultimately, effective managerial decision-making integrates careful analysis of costs, risks,

and long-term impacts to enhance organizational performance and resource allocation.

V. Reference

Adixitanuj. (n.d.). 6. Decision Involving Alternative Choices. Scribd.

https://www.scribd.com/document/707373437/6-Decision-Involving-

Alternative-Choices

Naveenpimg. (n.d.). Decisions Involving Alternate Choices. Scribd.

https://www.scribd.com/presentation/241968285/Decisions-Involving-

Alternate-Choices

Bansal, A. (n.d.). Alternative Choices And Decisions. Scribd.

https://www.scribd.com/presentation/141434377/Alternative-Choices-And-

Decisions

12