Read the summary and the most important questions on Drury Managerial Finance | 9781473734760 | Eugene F. Brigham, Joel F. Houston, Colin Drury

• 4 Measuring Relevant Costs and Revenues for Decision-Making

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• 4.1 Identifying relevant cost and revenues

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• Business decisions can be grouped in two main groups. Name them

  1. One time decisions
  2. Recurring or continuous decisions

• What does a one time decision entail?

  The management team is presented with the problem, makes a decision, implements it, and then cannot or will not change it anymore.
  Reversing is usually impossible or can be done only with great effort and/or cost

• What does recurring or continuous decisions entail?

  Decisions made about a series or flow of actions instead of one action.
  Management will decide on the expected activities, expenses, revenues and other outcomes and continuously monitor the progress of achievement of the goals and where necessary decide on corrective action or adjustment of the expectations.

• What is another general principle of business decisions?

  They need to be based on a clear, correct and complete overview of the positive and negative impact of the decision

• Some decisions are not routine. What needs to be taken under consideration?

  Special studies.
  These focus on whatever planning time horizon the decision-maker considers appropriate for a given situation. However it is important not to focus excessively on the short term, because the objective is to maximize long-term benefits.

• What are irrelevant costs? (3)

  1. Sunk costs (past costs) have already been incurred and cannot be avoided regardless of the alternatives being considered.
  2. Fixed costs: they are incurred to support the organization as a whole an generally will not change whichever alternative is chosen.
  3. Future costs that will be the same for all alternatives.

• 4.2 Importance of qualitative/non-financial factors

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• What are qualitative/non-financial factors?

  Those factors that cannot be expressed in monetary terms.

• 4.4 Product mix decisions when capacity constraints exist

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• How do limiting factors affect the short term and long term?

  Within a short term time period it is unlikely that constraints can be removed and additional resources acquired. Where limiting factors apply, profit is maximized when the greatest possible contribution to profit is obtained each time the scarce or limiting factor is used.

• 4.5 Replacement of equipment - Irrelevance of past costs

• Why is the replacement of equipment irrelevant?

  Replacement of equipment is a capital investment or long term decision that requires the use of discounted cash flow procedures. 
  One aspect of asset replacement decisions that should be considered is how to deal with the book value (written down value). 
  
  Book values are not relevant costs because they are past or sunk costs and are therefore the same for all potential courses of action.

• 4.6 Outsourcing and make or buy decisions

• What is outsourcing/make or buy decisions?

  Outsourcing is the process of obtaining goods or services from outside suppliers instead of producing the same goods or providing the same services within the organization.