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Decision-Making & Relevant Information - Coggle Diagram
Decision-Making & Relevant Information
Irrelevant + Relevant Information
Relevant
Has not happened, but will occur in the future
Cash flow differs when alternatives are picked
Opportunity costs are normally considered relevant costs
Irrelevant
Sunk costs are irrelevant
Decision model is a method where choices are made based on qualitative and quantitative information
Quantitative
Relevant costs
Irrelevant costs
Qualitative
Information without a direct impact on numeric analysis
For example, A decision's alignment with company values, or health and safety precautions
Short-term & Long-term Decisions
Decisions
What order in which to produce / sell products
Facility expansions
Proceeding with a special order
Whether a production process be outsourced
All decisions occur within the
relevant range
and / or
production capacity
Long-term
For example, accepting an order outside production capacity
In this instance, a facility expansion would become a relevant cost
How would the decision impact the company for longer than a year
Short-term
How would the decision impact the company within a year
For example, accepting a special order within production capacity
Other theories & concepts
Opportunity cost concept
Decides which alternative is more profitable
For example, buy product A or make product A
In this instance, due to capacity, only one alternative can be chosen, which will eliminate profits from the unchosen alternative
Total alternatives approach
Incorporates future costs / revenues for ALL products
For example, buy product A and make product B, or buy product B and make product A
Theory of constraints
Determines how to maximize profits when operations form a constraint
A constraint occurs when there is limited capacity
Focuses on managing bottleneck operations
Equipment replacement
Current disposal value is relevant
Loss on disposal is MUTE
This is because the loss on disposal is the difference between a relevant cost and an irrelevant cost
Book value is irrelevant
Cost of a new machine is relevant