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Lecture 6 – Decision Making

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INTRODUCTION TO DECISION MAKING Characteristics of Decision Information • Information accumulated for decision-making will include many characteristics, but also some that are specifically relevant to the decision-needs of managers. Cost Behaviour • Many of the decision-making techniques rely on a clear understanding of the behaviour of costs. o For example, CVP analysis is based entirely on the separation of costs into their fixed and variable categories. o Also review the pitfalls of incorrectly using unit costs. If the cost we are dealing with is a fixed cost, then for most decision-making issues (product pricing is an exception) per unit fixed costs should not be used - the total amount of the fixed costs is the appropriate item. Opportunity Cost • Opportunity cost is the revenue/profit foregone by not choosing its next-best alternative. • Opportunity cost is the contribution to income that is foregone (rejected) by not using a limited resource in its next-best alternative use. • Sunk Costs • These are costs which have been incurred in the past. They do not affect future costs and cannot be changed by any current or future action. • Sunk costs are never relevant costs. A common error when doing decision-making problems is to include sunk costs in the analysis.

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Lecture 6 – Decision Making
Topics this document covers:
Management accounting Costs Production economics Generally Accepted Accounting Principles Pricing Variable cost Fixed cost Cost of goods sold Cost Gross margin Overhead Contribution margin-based pricing
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Topics this document covers:
Management accounting Costs Production economics Generally Accepted Accounting Principles Pricing Variable cost Fixed cost Cost of goods sold Cost Gross margin Overhead Contribution margin-based pricing
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Cost Behaviour • Many of the decision-­‐making techniques rely on a clear understanding of the behaviour of costs. o For example, CVP analysis is based entirely on the separation of costs into their fixed and variable categories. o Also review the pitfalls of incorrectly using unit costs. If the cost we are dealing with is a fixed cost, then for most decision-­‐making issues (product pricing is an exception) per unit fixed costs should not be used -­‐ the total amount of the fixed costs is the appropriate item. Opportunity Cost • Opportunity ...
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