Page 243 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes According to Heinz Weihrich and Horold Koontz, “Decision-making is defined as the selection

of a course of action from among alternatives.”
George R. Terry says, “Decision-making is the selection based on some criteria from two or more
possible alternatives.”
According to Haynes and Masie, “Decision-making is a course of action which is consciously
chosen for achieving the desired results.”
Following are the important areas of decision-making or applications of marginal costing:
1. Fixation of Price,
2. Decision to Make or Buy,

3. Selection of a Profitable Product Mix,
4. Decision to Accept a Bulk Order,
5. Closure of a Department or Discontinuing a Product,
6. Maintaining a Desired Level of Profi t, and
7. Evaluation of Performance.

Self Assessment

Fill in the blanks:
1. Marginal cost helps management to make decision involving consideration of ………….
2. A decision involves the act of choice and the ……………. chosen out of the available
alternatives.
3. Marginal costing furnishes information regarding ……………. 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.

12.2 Determination of Sales Mix

In the market, dealership is offered by the various companies to the individual intermediaries
in promoting the sale of products. Before reaching an agreement with the company to act as

a dealer, normally every individual considers the profitability of the product mix offered by

the firm. For example, There are two different companies brought forth their advertisements in
offering the dealership to the individual trading fi rms viz. HCL and IBM.
The profi tability under the dealership banner should be appropriately considered prior to take

decision. To take rational decision, the firm should compare the profitability of both different

dealerships of two different giant industrial brands. The greater the share of the profi tability in
volume will be selected and vice-versa.
Example: From the following information has been extracted of EXCEL Rubber Products
Ltd:

Direct materials A ` 16
Direct Materials B ` 12
Direct wages A 24 Hrs at 50 paise per hour
Direct wages B 16 Hrs at 50 paise per hour
Variable overheads 150% of wages
Fixed overheads ` 1,500
Selling price A ` 50
Selling price B ` 40

238 LOVELY PROFESSIONAL UNIVERSITY