CHAPTER11DecisionMakingandRelevantInformation

Chapter11learningobjectivesUsethefive-stepdecision-makingprocessDistinguishrelevantfromirrelevantinformationindecisionsituationsExplaintheconceptofopportunitycostandwhymanagersshouldconsideritwhenmakinginsourcing-versus-outsourcingdecisionsKnowhowtochoosewhichproductstoproducewhentherearecapacityconstraintsExplainhowtomanagebottlenecks11-2

Chapter11learningobjectives,concludedDiscussthefactorsmanagersmustconsiderwhenaddingordroppingcustomersorbusinessunitsExplainwhybookvalueofequipmentisirrelevanttomanagersmakingequipment-replacementdecisionsExplainhowconflictscanarisebetweenthedecisionmodelamanagerusesandtheperformance-evaluationmodeltopmanagementusestoevaluatemanagers11-3

Informationandthedecisionprocess:DecisionModelsManagersusuallyfollowadecisionmodelforchoosingamongdifferentcoursesofaction.Adecisionmodelisaformalmethodofmakingachoicethatofteninvolvesbothquantitativeandqualitativeanalyses.Managementaccountantsanalyzeandpresentrelevantdatatoguidemanagers’decisions.Managersusethefive-stepdecision-makingprocesspresentedinChapter1tomakedecisions.11-4

Five-StepDecision-MakingProcess11-5

TheconceptofRelevanceRelevantinformationhastwocharacteristics:ItoccursinthefutureItdiffersamongthealternativecoursesofaction.Relevantcostsareexpectedfuturecosts.RelevantrevenuesareexpectedfutureRevenues.Pastcosts(historicalcosts)areneverrelevantandarealsocalledsunkcosts.11-6

TypesofInformationQuantitativefactorsareoutcomesthatcanbemeasuredinnumericalterms.Qualitativefactorsareoutcomesthataredifficulttomeasureaccuratelyinnumericalterms,suchassatisfaction.Qualitativefactorsarejustasimportantasquantitativefactorseventhoughtheyaredifficulttomeasure.11-7

FeaturesofRelevantInformationPast(historical)cost