Marginal costing is the ascertainment of marginal cost and of the effect on profit of changes in volume by differentiating between fixed costs and variable costs. Marginal cost is the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. Marginal costing is a very useful tool for management because of its applications. It is used in providing assistance to the management in vital decision-making both short term and long term. Differential analysis is the process of estimating the consequences of alternative actions that a decision maker may take.
It is used both for short term and long term decisions. Short term decisions relates to fixing price for the product, selecting a suitable product mix, diversification of the product etc while long term deals with capital budgeting decisions. Objectives After studying this unit, you should be able to: · Explain the steps involved in decision making process · Know various types of decision choices · Analyze and interpret various decision choices 13. 2 Decision Making Decision making is the process of evaluating two or more alternatives leading to a final choice known as alternative choice decisions.
Decision making is closely associated with planning for the future and is directed towards a specific objective or goal. Decision model contains the following decision-making steps or elements: 1. Identify and define the problem 2. Identify alternative as possible solutions to the problem. 3. Eliminate alternatives that are clearly not feasible 4. Collect relevant data (costs and benefits) associated with each feasible alternative 5. Identify cost and benefits as relevant or irrelevant and eliminate irrelevant costs and benefits from consideration. . Identify to the extent possible, non-financial advantage and disadvantage about each feasible alternative. 7. Total the relevant cost and benefits for each alternative 8. Select the alternative with the greatest overall benefits to make a decision 9. Implement or execute the decision 10. Evaluate the results of the decision made. 13. 3 Types of Costs A decision involves selecting among various choices. Non routine types of decisions are crucial and critical to the firm as it involves huge investments and involve much uncertainty.
Short term decision making is based on relevant data obtained from accounting information. · Relevant Cost are costs which would change as a result of the decision. · Opportunity costs are monetary benefits foregone for not pursuing the alternative course. When a decision to follow one course of action is made, the opportunity to pursue some other course is foregone. · Sunk costs are historical cost that cannot be recovered in a given situation. These costs are irrelevant in decision making. · Avoidable costs are costs that can be avoided in future as a result of managerial choice.