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Managerial Accounting: Business Decisions and Costs

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Question 1 (Required, 2 to 3 lines on each point).
In order to assist the managers and Board of Management you are compiling a resource which will define the various management accounting terms used in the process of strategic analysis.
Provide an explanation of the following terms, with examples which incorporate a reason why each concept is relevant or not relevant to decision-making:
- Sunk cost,
- Incremental cost,
- Opportunity cost,
- Cost structure,
- Tactical decisions.

Question 2
ORC offers its business clients a restricted menu for breakfast, available form 6.00 am to 9.00 am. The cooked meal component, usually eggs and up to 3 side orders is provided by the Hotel restaurant for a cost of $10 per order, irrespective of the items ordered.
The restaurant division manager has advised the ORC manager that the cost will rise to $15 from next month. The ORC manager has decided that based on quotes received from the café next door this service will be provided externally for the current market price ie $10 per order. The variable cost per meal delivered is $8. The restaurant has capacity to continue to offer the meal service.
The restaurant manager is unhappy and has asked you to direct the manager of ORC to continue to purchase the breakfast meals internally.

Required:
a) What effect, if any, does capacity have on the minimum transfer price? (Required, 2 to 3 lines)
b) Should the current transfer price be continued, why? If you disagree, what is your recommendation for the transfer price? (Required, 5 lines)
c) What other considerations should management factor into the decision making process in regard to purchasing from external sources or cutting the selling price? (Required, 8 lines)

Question 3.
The Board of Management had been focused on decision-making about events occurring in the next month, only ever considering a longer term question when they set budgets, which typically have focused on the previous year's events. You would like to encourage the Board of Management to adopt a stronger strategic focus rather than operational in their approach to decision making. Explain the difference between operational and strategic management. Ensure you provide examples and current thinking about the role each type of decision-making plays within an organisation. (Required, 2 to 3 paragraphs)

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Solution Summary

The following posting helps with managerial accounting problems. Concepts covered include business decisions and costs,

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Please refer to the attached file for the response.

COSTS AND STRATEGIC MANAGEMENT

CASE 1
In order to assist the managers and Board of Management, you are compiling a resource which will define the various management accounting terms used in the process of strategic analysis.

Explanation of terms, with examples and reasons why each concept is relevant or not relevant to decision-making:

Sunk cost
These are cash flows that have already taken place regardless of the decision to be made. An example is in a decision to introduce into the market a new variant of coffee. This decision is about to be made after the company produced such a variant of coffee. Assuming that the company conducted a market test before the actual production, the cost incurred in market testing the product is considered a sunk cost because the market testing has occurred regardless of whether the company would indeed introduce the new variant to the market or not.
Since sunk cost does not affect the decision, it is considered as an irrelevant cost.

Incremental cost
These are costs that would not have happened if the decision was not made (Keown, 2003). These are the costs that increased correspondingly as a result of the decision.
Example: In the previous decision on whether to introduce a new variant of coffee in the market or not. If the introduction would require an additional sales people to focus on pushing the new product into the market, the commission that would be given to the additional sales people would be an incremental cost and would be relevant in the decision that is about to be made.

Opportunity cost
These are earnings foregone as a result of the decision to be implemented. In the previous example, the decision to offer the new variant of coffee wherein the company would be spending marketing costs amounting to $50,000 would mean an opportunity cost equivalent to the earnings that the company would have generated if the $50,000 would have been used in another investment venture (e.g. investing in bonds with an interest of 8% per annum). The earnings foregone which are 5% of the marketing cost are the opportunity costs incurred by the company. Since opportunity cost should reflect net ...

Solution provided by:
Elisa Valdez, PhD
Education
  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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