Decision Making in Costing

8/14/2019 Decision Making in Costing

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Paramjit Sharma

decision making
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Paramjit Sharma

decision making- process

defining the problemidentifying alternatives

determine relevant cost

& revenue data

evaluating the dataconsidering non cost factors

making decision


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Paramjit Sharma

Special costs for decision making

relevant costs & irrelevant costssunk costsdifferential costs

marginal costsimputed costsopportunity costsreplacement costs

out of pocket costsfuture costsconversion cost


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Paramjit Sharma

special decision making areas

selling price decisions

make or buy decisionssales mix decisionselecting suitable method

of productionplant shut down decisions
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Paramjit Sharma

special decision making areas

selling price decisions

Competition & depressionAdditional ordersUtilizing spare capacityExport market
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Paramjit Sharma

Selling at or below marginal cost

to popularize new producteliminate competitorsdispose perishablesearning foreign Exchangeto keep pm in operationprevent future loss of Ordershelping other products makingprofits

Keeping employees Occupied


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Paramjit Sharma

pricing in competition & depression

may be priced below total cost

under marginal costing it may be above mc

production may continue

for a short term only


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Paramjit Sharma

additional orders exploring foreign markets

under utilized capacity

order below total cost but above mc

export sales may result in additional costs

additional cost be deducted from profits

subsidy exemptions be deducted from cost


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Paramjit Sharma

make or buy decisions

Outside price comparedwith marginal cost

Outside ifmc>op

Inside ifmc


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Paramjit Sharma

sales mix decisions

proportion in which various productsare produced or sold

Selecting most profitable mix


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Paramjit Sharma

Selection of a suitable method of production

new product

whether to go for machine or hand labour

ordinary or automatic machine

select -which gives largest contribution


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Paramjit Sharma

plant shut down- not sufficient business

temporary suspension

permanent suspension


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Paramjit Sharma


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Paramjit Sharma

differential cost is the difference in cost

between two alternatives


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Paramjit Sharma

Incremental revenue is the difference in revenue

between two alternatives


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Paramjit Sharma

-application

determining optimum level of production

accepting a special order

adding or dropping a product

evaluating make or buy alternatives

Introducing an additional shift


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Paramjit Sharma

-application

determining optimum level of production


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Paramjit Sharma

-application

accepting a special order


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Paramjit Sharma

-application

adding or dropping a product


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Paramjit Sharma

-application

evaluating make or buy alternatives


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Paramjit Sharma

-application

Introducing an additional shift

Capacity units of V C FC TC DIFF SALES

Incremental

outputs Rs Rs Rs Rs Rs

Revenue60% 60000 9000 40000 49000 540000 ---

70% 70000 10500 40000 50500 1500 56000 2000

80% 80000 12000 40000 52000 1500 60000 4000

90% 90000 13500 40000 53500 1500 60300 300

100% 100000 15000 40000 55000 1500 61000 700

Decision Making in Costing

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