Topic: Decision-making techniques

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  • 3 Marks

MI – May 2024 – L1 – SB – Q4b – Decision-making techniques

Explain the three flows in supply chain management.

b. List and explain briefly the THREE supply chain management flows. (3 Marks)

  • Product Flow: Involves the movement of goods from suppliers to customers, including returns, repairs, and services. It ensures that products are efficiently delivered to meet customer demand.
  • Information Flow: Refers to the exchange of data and information related to orders, deliveries, and inventory status between all parties involved in the supply chain. This flow helps to optimize decision-making and coordination across the supply chain.
  • Financial Flow: Deals with the movement of money, credit terms, and payment schedules between buyers and sellers. It includes the financial transactions required for purchasing materials, goods, or services.
  • 5 Marks

MA – Nov 2019 – L2 – Q4b – Introduction to management accounting

Identifies five qualities of good management accounting information and their importance in decision making.

Good decisions do not only emanate from good decision-makers but also from the quality of information used in the decision-making process.

Required:
Identify FIVE (5) qualities of good management accounting information. (5 marks)

  • Relevance: Information must fit the purpose for which it was gathered, aiding managers in making appropriate decisions.
  • Completeness: Information should be complete, avoiding sub-optimal decisions by providing all necessary data.
  • Accuracy: The information must be correct, preventing misleading conclusions.
  • Clarity: It should be easy to understand to ensure managers can act on it properly.
  • Timing: Information should be available when needed, allowing managers to make timely decisions.

(5 marks evenly spread)

  • 20 Marks

MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques

Calculate the minimum price for a special order using relevant costing principles, and discuss the relevance of fixed costs in decision-making scenarios.

You are the Management Accountant for Darkoah Publishing Ltd which has been asked to send a quotation for the production of a programme for the local village fair. The work would be carried out in addition to the normal work of the company. Because of existing commitments, employees would be required to work during weekends to complete the printing of the programme. A trainee accountant has produced the following cost estimate based upon the resources required as specified by the production manager:

You are aware that considerable publicity could be obtained for the company if you are able to win this order, and the price quoted must be very competitive.

The following notes are relevant to the cost estimate above: i) The paper to be used is currently in stock at a value of GH¢5,000. It is of an unusual colour and has not been used for some time. The replacement price of the paper is GH¢8,000, whilst the scrap value of what is in stock is GH¢2,500. The production manager does not foresee any alternative use for the paper if it is not used for the village fair programme.

ii) The inks required are not held in stock. They would have to be purchased in bulk at a cost of GH¢3,000. However, only 80% of the ink purchased would be used in printing the programme. No other use is foreseen for the remainder.

iii) Skilled direct labour is currently at full capacity, but additional labour can be hired. To accommodate the printing of the programmes, 50% of the time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is GH¢4.00 per hour.

iv) Unskilled labour is presently under-utilised, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled labour hours would have to occur at this time, but the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked.

v) Variable overhead represents the cost of operating the printing press and binding machines.

vi) When not being used by the company, the printing press is hired to outside companies for GH¢6.00 per hour. This earns a contribution of GH¢3.00 per hour. There is unlimited demand for this facility.

vii) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.

viii) The cost of the estimating department represents time that has already been incurred during discussions with the village fair committee concerning the printing of its programme.

Required: a) Prepare a revised cost estimate using a relevant cash flow approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resource valuation in your cost estimate. (17 marks)

b) Briefly discuss the statement “fixed costs are never relevant for decision making scenarios”.

(3 marks)

 

  1. Book value is irrelevant because it is a sunk cost; as there is no other use, replacement would not occur so the opportunity cost or scrap sale proceeds is relevant value.
  2. Since this involves a future cost if the work is undertaken, the purchase price should be used. Since the remaining stock has no foreseeable use it has no value so the entire purchase costs is used.
  3. Since skilled labour would work over the weekends, the full cost is relevant; 125 hours @ GH¢4/hr = GH¢500 125 hours @ GH¢5/hr = GH¢625
  4. The weekend work results in 50 hours’ time off in lieu- this, with the 75 other hours worked , totals 125 hours, which is less than the 200 hours of idle time which are already being paid for; thus there is no incremental cost.
  5. This is a future cost which will be incurred if the work is undertaken.
  6. The depreciation is a past cost and should be ignored, however the use of the press has an opportunity cost. If this work is undertaken, the press is not available for hire. The opportunity cost is the contribution which would be earned from hiring: 200 hours @ (GH¢6- GH¢3)
  7. As these costs are unaffected by the decision they should be ignored
  8. These costs are pasts or sunk costs and should be ignored.

b) Generally, the classification of costs as fixed or variable identifies those costs which changes in total when activity changes (variable costs) and those whose total remains constant (fixed costs).

Relevant costs are those which are affected by a decision, and since most decisions affect activity levels, variable costs (which change when activity changes) can be seen to be relevant costs.

However, it does not automatically follow that fixed costs are not relevant. Some fixed costs may be specific to product or department and therefore may be avoidable. For example, a decision to discontinue a product will cause the product specific cost to be saved.

The general notion that fixed costs are not relevant is therefore incorrect thus each decision must be considered individually. There would be circumstances when fixed cost must be considered relevant, due to their avoidability.

  • 10 Marks

MA – May 2020 – L2 – Q5a – Relevant cost and revenue, Decision making techniques

Determine the optimum production plan for Blasius Ltd based on given resource constraints and calculate the total contribution.

Blasius Ltd is a leading manufacturer of furniture in Ghana. The company manufactures these three garden furniture products – chair, bench, and table. The budgeted unit cost and resource requirements of each of these items are detailed below:

Product Chair (GH¢) Bench (GH¢) Table (GH¢)
Timber cost 5.00 15.00 10.00
Direct labour cost 4.00 10.00 8.00
Variable overhead cost 3.00 7.50 6.00
Fixed overhead cost 4.50 11.25 9.00
Total Cost 16.50 43.75 33.00

Budgeted volumes per annum:

Product Quantity
Chair 3,500
Bench 1,900
Table 1,350

These volumes are believed to equal the market demand for these products. Fixed overhead costs are attributed to the three products on the basis of direct labour hours. The cost of the timber is GH¢2.00 per square metre.

The products are made from a specialized timber. A memo from the purchasing manager advises you that because of a problem with the supplier, this specialized timber is limited in supply to 20,000 square metres per annum.

The sales director has already accepted an order for 500 chairs, 100 benches, and 150 tables which, if not supplied, would incur a financial penalty of GH¢2,000. These quantities are NOT included in the market demand estimates above.

The selling prices of the three products are:

Product Selling Price (GH¢)
Chair 20.00
Bench 50.00
Table 40.00

Required:

a) Determine the optimum production plan and state the total contribution that this would yield. (10 marks)

Contribution per Unit

Product Chair (GH¢) Bench (GH¢) Table (GH¢)
Selling Price 20.00 50.00 40.00
Variable Cost (12.00) (32.50) (24.00)
Contribution per Unit 8.00 17.50 16.00

Contribution per Square Metre of Timber

Product Chair Bench Table
Timber Usage (sq.m) 2.5 7.5 5.0
Contribution per Unit 8.00 17.50 16.00
Contribution per sq.m 3.20 2.33 3.20

Ranking:
1st = Chair, Table
2nd = Bench

Optimum Production Plan

Product Quantity Timber Usage (sq.m) Contribution (GH¢)
Minimum Order Fulfillment:
Chair 500 1,250 4,000
Bench 100 750 1,750
Table 150 750 2,400
Total 2,750 8,150
Remaining Timber Allocation: 17,250
Chair 3,500 8,750 28,000
Table 1,350 6,750 21,600
Bench 233 1,747.5 4,077.5
Total Contribution 19,997.5 61,827.5

Since the optimum plan includes production of sufficient quantities of each item to meet the order comprising the minimum demand, and production of the most profitable items already meets the maximum demand, there is no need to consider the financial penalty.

(8 marks evenly spread using ticks)

  • 20 Marks

MA – May 2021 – L2 – Q5b – Decision making techniques, Budgetary control

Recommend the quantities Agrow Ltd should produce in-house and purchase externally, along with the total annual cost.

Agrow Ltd is a community company that manufactures and sells car components; Wiper, Driving mirror, and Brake pad. The budgeted information for the next year is expected to be as follows:

WIPERS DRIVING MIRROR BRAKE PAD
Production (units) 50,000 25,000 35,000
GH¢ GH¢ GH¢ GH¢
Selling price per unit 34 30 28
Direct material per unit 9 10 5
Direct labour cost per unit 18 3 12
Variable production overhead 1 2 1

Direct labour is paid at GH¢12 per hour. While other production factors are unlimited, labour is limited to 102,500 hours. Hence, an extra component must be purchased from an external supplier.

Total fixed cost per annum is expected to be as follows:

Cost GH¢
Incurred as a direct consequence of making any quantity of Wiper 140,000
Incurred as a direct consequence of making any quantity of Driving mirror 255,000
Incurred as a direct consequence of making any quantity of Brake pad 150,000
Other Fixed Cost 60,000
Total Fixed Cost 605,000

An external supplier has offered to supply a unit of the following at their respective prices:

Component GH¢
Wiper 32
Driving mirror 24
Brake pad 23

Required:

a) Advise which of the products Agrow Ltd should make in-house or outsource. (7 marks)

b) Recommend the quantities that Agrow Ltd should make and the quantities it should buy externally to obtain the required quantities of all the parts and calculate the total annual cost. (10 marks)

c) State THREE (3) factors to consider before setting a selling price of a product. (3 marks)

(Total: 20 marks)

a) Make or Buy Decision for Agrow Ltd

Component Wiper Driving Mirror Brake Pad
Marginal cost per unit (GH¢) 28 15 18
Demand (units) 50,000 25,000 35,000
Total variable cost 1,400,000 375,000 630,000
Cost incurred as a direct consequence of making 140,000 255,000 150,000
Total cost of making the product 1,540,000 630,000 780,000
Cost of buying:
50,000 x GH¢32 1,600,000
25,000 x GH¢24 600,000
35,000 x GH¢23 805,000
Cost saving / (extra) for making the product 60,000 (30,000) 25,000

Decision:

  • Wiper: Make in-house (as the cost saving is GH¢60,000).
  • Driving Mirror: Buy externally (as buying saves GH¢30,000).
  • Brake Pad: Make in-house (as the cost saving is GH¢25,000).

(7 marks)

b) Production and Purchase Plan for Agrow Ltd

Product Quantity Contribution per unit Labour hour per unit Contribution per labour hour Rank
Wiper 50,000 GH¢6 1.5 GH¢4 2nd
Brake Pad 35,000 GH¢10 1 GH¢10 1st

Production Plan:

Product Quantity to Make Labour Hours Hours Available
Brake Pad 35,000 35,000
Wiper 45,000 67,500
Total Hours 102,500

Buying Plan:

  • Wiper: Buy 5,000 units.
  • Driving Mirror: Buy 25,000 units.

Total Annual Cost:

Product Quantity Cost per unit (GH¢) Total Cost (GH¢)
Brake Pad (make) 35,000 18 630,000
Wiper (make) 45,000 28 1,260,000
Wiper (buy) 5,000 32 160,000
Driving Mirror (buy) 25,000 24 600,000
Direct consequence of making Wiper – – 140,000
Direct consequence of making Brake Pad – – 150,000
Other Fixed Cost – – 60,000
Total Cost 3,000,000

(10 marks)

c) Factors to Consider in Setting a Selling Price

  1. Cost of production: Ensures that the selling price covers all costs and yields a profit.
  2. Price of competing firms: Helps to position the product competitively in the market.
  3. Purchasing power of customers: Ensures the price is aligned with what customers can afford.

(3 marks)

Total Marks for Question 5: 20 marks

  • 20 Marks

IMAC – MAY 2020 – L1 – Q3 – Cost-Volume-Profit (CVP) Analysis | Decision-making techniques

Identify public sector decision areas for management accounting, suggest improvement techniques, and state CVP analysis assumptions.

) Management Accounting provides information for planning, control, and decision-making. It has been argued that Public Sector entities can even benefit more from Management Accounting than profit-making entities.

Required:
i) Identify FOUR (4) decision areas of the Public Sector where Management Accounting can be applied. (6 marks)
ii) Suggest an appropriate technique that can be used to improve decision-making in such areas. (9 marks)

b) State FIVE (5) assumptions underlying cost-volume-profit analysis in managerial accounting. (5 marks)

a)
i) Decision Areas in Public Sector

  1. Outsourcing of services: e.g., cleaning, ICT
  2. Capital investment: e.g., construction of buildings, purchase of vehicles
  3. Budgeting
  4. Evaluation of MMDAs (Metropolitan, Municipal, and District Assemblies)
  5. Procurement and utilization of supplies: e.g., stationary
    (Any 4 points for 1.5 marks = 6 marks)

ii) Techniques to Improve Decision-making

  1. Relevant Costing: Use of relevant costs for decision-making in outsourcing decisions.
  2. Investment Appraisal Techniques: e.g., Net Present Value (NPV), Internal Rate of Return (IRR) for evaluating capital investments.
  3. Budgetary Control: Implementing budgets to monitor and control expenditures.
  4. Balanced Scorecard: A tool to assess the performance of public sector entities across various dimensions.
  5. Economic Order Quantity (EOQ) and control levels: To manage inventory efficiently.
    (9 marks)

b) Critical Assumptions of CVP Analysis

  1. Cost Classification: All costs can be segregated into fixed and variable elements.
  2. Constant Fixed Costs: Fixed costs will remain constant, while variable costs vary proportionately with the level of activity.
  3. Sales Assumptions: All that is produced can be sold.
  4. Single Cost and Revenue Driver: The only factor affecting costs and revenues is the volume of activity.
  5. Unchanging Conditions: Technology, production methods, and efficiency remain unchanged.
  6. No Inventory Changes: There are no inventory level changes, or inventories are valued at marginal cost.
  7. No Uncertainty: There is no uncertainty in costs and revenues.
  8. Product Mix: A single product or a constant product mix is produced and sold.
    (Any 5 points for 5 marks)

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