Short Term Decisions

In: Business and Management

Submitted By SMARTMJ
Words 1147
Pages 5
5 Short-term Decision Making
5.1
Introduction and objectives
Previous chapters have focused on the nature of costs and how they behave in relation to changes in activity and over time. The nature of costs is an important factor to consider in decision making. Types of decisions are usually split into short and long-term. Chapter 14 (Capital Investment Appraisal) considers the longer-term decision-making process, whilst this chapter focuses on the short-term.
After studying this chapter you will be able to:
„„
Understand costs that are relevant to the decision-making process in different circumstances
„„
Demonstrate working knowledge of typical short-term decisions managers have to make and how financial data can support these decisions
„„
Recognise the issues of managing scarce recourses in decision making; and
„„
Appreciate the implications of outsourcing in a business context.
5.2
Relevant costs in decision making
Relevant costing is a management accounting term and relates to focusing on only the costs relevant to a specific decision being made. It simplifies the decision-making process as it ignores cost data that is ‘irrelevant’, or will not have an impact on the specific decision being made. When making a particular decision-relevant costs are those that may change, depending on the decision taken.
Relevant costing is often used in short-term decision making and a number of specific practical examples are illustrated later in this chapter. A typical decision could involve, a venue has been hired for a commercial event to take place in two weeks’ time, unfortunately ticket sales have been very slow and it looks as though the event will be run at a loss. The manager of the events company needs to make
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5
Short-term Decision Making the decision: ‘Should the event be cancelled or not?’ from a financial perspective he would need to look at the…...

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