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Management Accounting for Decision Making

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Management accounting information is used for decision making such as to accept or reject special sales order, fix selling or tender price, add or delete a product line or department, maximise profits with a limited productive capacity or scarce resources, make or buy a component, or further process joint products (Berry & Jarvis, 1997; Dyson, 2003; Glynn & Murphy, 1998; Mott, 1991). The management accounting information used in decision making is relevant costs such as differential and marginal costs. Differential costs or incremental costs are differences in costs between alternatives when there is a change in the activity level.

Marginal costs are variable costs incurred as a result of undertaking a certain activity or the costs that can be avoided if the activity was not undertaken. A special sales order, such as an order of a particularly large quantity such that certain costs can be reduced, can be accepted if it gives a positive contribution margin (sales minus marginal costs), provided the organization has idle capacity, fixed costs will not change, normal sales at regular prices will not be disrupted, and no other special order that is more profitable can be obtained.

The selling or tender price is used to determine the target market of the organization’ s products. Some products may be sold in a luxury market where prices may be higher but quantities are lower, or at lower prices to the general market where higher quantities can be expected. The target market should be the one whereby the product generates the highest contribution margin. Similarly, in the decision of the addition or deletion of a product line or department, only relevant information such as the sales generated by the product line or department, as well as the direct costs, variable costs, and avoidable fixed costs of the product line or department should be considered.

In resource allocation, the management accounting information used is contribution per unit of a constrained resource, provided that fixed costs do not vary.

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preview essay on Management Accounting for Decision Making
  • Pages: 8 (2000 words)
  • Document Type: Essay
  • Subject: Business
  • Level: Masters
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