Decisions involve a choice among alternative courses of action.
According to Kimmel et.al ,”Financial data relevant to a decision are the data that vary in the future among alternatives. Both costs and revenues may vary, or only revenues may vary, or only costs may vary. Incremental Analysis is Process used to identify the financial data that change under alternative courses of action.”
All, what is a sunk cost?
With all this talk about incremental analysis and decision making, what about the qualitative factors?
According to Kimmel, Weygandt, & Kieso, (2016) quantative factors, those attributes that are expressed in monetary terms, affect decisions; however, so do qualitative factors. Qualitative factors, while not easily measured, should always be taken into consideration when making a decision. For instance, the chapter’s reading listed an example of a qualitative factor as “the cost of low morale” (if a local factory were to be shutdown).
In my current position, I deal with corporate social responsibility (CS) issues. The majority of the workload is answering in-depth (300+ surveys / self assessments) regarding my companies practices. The issues dig into every aspect of the ethical treatment (fair labor practices) of our employees, our customers, our community and environment. They want to know if we are monitoring our suppliers and their anti-slavery / human trafficking practices, where our contractual requirements are for suppliers, contractors etc. How many women vs men, how many African American women are executive, how many Hispanic men are middle management etc.. They are very intrusive, but if we don’t comply (or publish policies, provide proof of practices etc.) they cut off business or threaten to withhold business. It’s brutal.
An important purpose of management accounting is to provide managers with relevant information for decision making. Note that since sunk costs cannot be changed, they are usually irrelevant to decision making.
Accounting helps management in making decisions by evaluating possible courses of action (step 2) and reviewing results (step 4).
All, what is the difference between financial and non-financial information?
Blanca, do you recall what we said relevance means in accounting?
When dealing with the decision to retain or eliminate an unprofitable segment, we must focus on relevant costs, and consider the effect on related product lines. For example, fixed costs allocated to the unprofitable segment must be absorbed by the other segments, and net income may decrease when an unprofitable segment is eliminated.
All, what is the general rule with regards to keeping an unprofitable segment? What should exceed what?
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