CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION LEARNING OBJECTIVES Use the five-step decision process to make decisions Differentiate relevant from irrelevant costs and revenues in decision situation Distinguish between quantitative and qualitative factors in decisions Beware of two potential problems in relevant-cost analysis Explain the opportunity-cost concept and why it is used in decision making Know how to choose which products to produce when there are capacity constraints Discuss what managers must consider when adding or discontinuing customers and segments Explain why the book value of equipment is irrelevant in equipment-replacement decisions Explain how conflicts can arise between the decision model used by a manager and the performance evaluation model used to evaluate the manager CHAPTER OVERVIEW Chapter 11 is about the decision-making process. Accountants are an integral part of this process, providing information to decision makers. A five-step approach to making decisions, beginning with the point in the process in which the accountants typically become involved, is described in the chapter. An extremely useful concept is presented. The information needed for the decision process must be relevant to the decision. Relevant is defined as revenues and costs that occur in the future and differ among the alternative courses of action available to the decision maker. This definition is illustrated through various situations. In this chapter the information needed for decisions of one-time-only special orders, make-or-buy, drop-or-add, and keep-or-replace are explained. Several of the chapters that follow will introduce other types of decisions that use the concept of relevant revenues and costs. A theme of the text is that information generated by the accounting system is used for the benefit of managers in making decisions. The roles performed by accountants are implicit in the illustrations of relevant information gathered for decisions—problem solving, scorekeeping, and attention directing. A review of those roles from Chapter 1 could be used to highlight their importance in the decision process. The last step of the decision process is evaluating performance. The last section of the chapter deals with conflicts between the decision model used by a manager and the performance model then used to evaluate that manager. This is an important discussion. Linear programming as a tool in the decision process is described in the appendix.
CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION LEARNING OBJECTIVES Use the five-step decision process to make decisions Differentiate relevant from irrelevant costs and revenues in decision situation Distinguish between quantitative and qualitative factors in decisions Beware of two potential problems in relevant-cost analysis Explain the opportunity-cost concept and why it is used in decision making Know how to choose which products to produce when there are capacity constraints Discuss what managers must consider when adding or discontinuing customers and segments Explain why the book value of equipment is irrelevant in equipment-replacement decisions Explain how conflicts can arise between the decision model used by a manager and the performance evaluation model used to evaluate the manager CHAPTER OVERVIEW Chapter 11 is about the decision-making process. Accountants are an integral part of this process, providing information to decision makers. A five-step approach to making decisions, beginning with the point in the process in which the accountants typically become involved, is described in the chapter. An extremely useful concept is presented. The information needed for the decision process must be relevant to the decision. Relevant is defined as revenues and costs that occur in the future and differ among the alternative courses of action available to the decision maker. This definition is illustrated through various situations. In this chapter the information needed for decisions of one-time-only special orders, make-or-buy, drop-or-add, and keep-or-replace are explained. Several of the chapters that follow will introduce other types of decisions that use the concept of relevant revenues and costs. A theme of the text is that information generated by the accounting system is used for the benefit of managers in making decisions. The roles performed by accountants are implicit in the illustrations of relevant information gathered for decisions—problem solving, scorekeeping, and attention directing. A review of those roles from Chapter 1 could be used to highlight their importance in the decision process. The last step of the decision process is evaluating performance. The last section of the chapter deals with conflicts between the decision model used by a manager and the performance model then used to evaluate that manager. This is an important discussion. Linear programming as a tool in the decision process is described in the appendix.
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