Page 242 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 12: Decisions Involving Alternative Choices
Sukhpreet Kaur, Lovely Professional University

Unit 12: Decisions Involving Alternative Choices Notes

CONTENTS

Objectives
Introduction
12.1 Concept of Decision-making
12.2 Determination of Sales Mix
12.3 Make or Buy Decisions

12.4 Own or Hire
12.5 Shut Down or Continue
12.6 Summary
12.7 Keywords

12.8 Review Questions
12.9 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the concept of decision making
Illustrate the determination of sales mix

Discuss make or buy decisions, own or hire and shut down or continue decisions
Introduction

The need for a decision arises in business because a manager is faced with a problem and
alternative courses of action are available. A manager have to take different decisions like make
or buy, continue or shut down, etc. to make the maximum profit. In deciding which option to

choose he will need all the information which is relevant to his decision; and he must have some
criterion on the basis of which he can choose the best alternative. Some of the factors affecting
the decision may not be expressed in monetary value. Hence, the manager will have to make
‘qualitative’ judgements, e.g. in deciding which of two personnel should be promoted to a
managerial position. A ‘quantitative’ decision, on the other hand, is possible when the various
factors, and relationships between them, are measurable.

12.1 Concept of Decision-making

Marginal cost helps management to make decision involving consideration of cost and revenue.
Basically, marginal costing furnishes information regarding additional costs to be incurred if an
additional activity is to be taken up or the saving in costs which may be expected if an activity is

given up. This can be compared with the benefit expected from the proposed course of action and
thus the management will be able to take the appropriate decision.
Decision-making describes the process by which a course of action is selected as the way to deal
with a specifi c problem. A decision involves the act of choice and the alternative chosen out of
the available alternatives.

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