Chapter 17

Decisions Involving
Alternative Choices

Introduction
Managerial decision-making is the
process of choosing among alternative
courses of action.
The manager chooses that course of
action which he considers as the most
effective means of achieving goals and
solving problems.
All decisions are futuristic in nature,
involving a forecast of what
management thinks is likely to occur.
Management Accounting
By Paresh Shah
Oxford University Press

Steps In Decision-making
Defining the Problem
Perceptive analysis and insight may be
required to articulate the problem. The real
problem may have to be distinguished from
the apparent one.

Developing the alternative choices

In the initial stages of developing
alternative solutions several possibilities may
arise. The manager should eliminate those
which are clearly unattractive and narrow his
choice down to a few, perhaps two or three.
Management Accounting
By Paresh Shah
Oxford University Press

Steps In Decision-making
Evaluating the alternatives
Each solution may have several advantages
and disadvantages. These have to be weighed
and balanced for judging its overall desirability.

Arriving at a decision
Once the alternative courses of action are
evaluated in terms of their measurable and
non-measurable effects, the decision maker
will be in a position to select one of the
alternatives.
Management Accounting
By Paresh Shah
Oxford University Press

Characteristics Of Relevant
Costs For Decision-making
They are expected future costs
If the same costs are incurred for both the
alternatives, then they are not relevant.
The difference between the amounts of
the two costs is called differential cost or
incremental cost.
Differential Costs = Cost of one
alternative
Cost of other
alternative
Management Accounting
By Paresh Shah
Oxford University Press

Accounting Data For Decisionmaking

Costs from cost accounting system

Variable costs
Opportunity costs
Depreciation
Fixed costs

Management Accounting
By Paresh Shah
Oxford University Press

Application Of
Decision-making Concepts
Differential cost analysis
Incremental Profit
Incremental revenue
Incremental costs

Management Accounting
By Paresh Shah
Oxford University Press

Practical Applications
Of Marginal Costing

Evaluation of performance
Profit planning
Fixation of selling price
Make or buy decisions
Optimizing product mix
CVP analysis in multi-product situations
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
Cost control
Flexible budget preparation
Management Accounting
By Paresh Shah
Oxford University Press

Problem Of Limiting Factor

Under the marginal costing technique,
profitability is measured in terms of the
contribution, and the products generating
maximum contribution or
having maximum P/V ratio are treated as
the maximum profitable products.
These factors are in the form of limiting
factor, or key factor, or scarce factor.
A limiting factor is defined as the factor which
limits the volume of output or the level of
activity
Management Accounting
By Paresh Shah
Oxford University Press

Role Of Cost In Decisionmaking

Profit = Revenues Costs
It is clear that a reduction in cost is one
way to increase profits. The other way is to
increase revenues.
When reducing costs, it is important to
ensure that there is no corresponding
reduction in revenues
In decision-making, the management seeks
to minimize costs, but not by sacrificing
revenues. Secondly, it is the price that
justifies cost in competitive markets.
Management Accounting
By Paresh Shah
Oxford University Press