Relevant Information for Decision Making - Essay Example

Relevant Information for Decision Making Introduction Decision making is considered as an outcome of processes that can lead to the selection of a course of action among several alternatives. Relevant information for decision making refers to information to be used at some future time and do have some difference for each option available to the decision maker, for instance in relation to relevant costs in replacing equipment we will include the cost of purchasing a new equipment, installation cost, operation cost, and the disposal cost of the current equipment, the cost of repair of the old machine (Hansen & Mowen, 2000).

The irrelevant cost will be the purchase price. As per our case we have a firm that wants to choose a basic service function that is provided by another firm operating outside, this refers to outsourcing. Relevant cost information is useful in identifying the relevant cost in the decision to outsource or produce the goods within the firm. An example of a non relevant cost is that which will not differ between the options i.e. if there is no alternative use for space utilized by the internal manufacturer then the cost of the space is not relevant since this cost will continue whether the production is done by the company or outsourced (Hansen & Mowen, 2000).

BMC cost of production per unit is given by; Direct materials…………….165 Direct labor………………..168 Factory floor space………….5 Supervisory labor……………7 General overhead………….80 Total unit cost $ 425 The total unit cost provided by Far East Enterprises is $400. By just observing the two figures, an individual or the BMC Company will want to subcontract FEE Company, but as a management accountant several factors have to be considered before the decision. Recommendations In my own recommendation whether to outsource or not, I will inform BMC Company to consider first the following factors in their decision making process, a) When BMC Company will lay off direct labor employees, there will be a fine of $660 per employee per year and, this will affect the financial statement of the company.

This will go for a period of four years. b) The ten supervisors each earning $6000 per month, will be assigned to other supervisory position, and this in turn cannot reduce the fixed cost. The most important issue in the company is how to reduce the cost and maximize profit. c) The contribution margin factor should also be taken into consideration. This will assist the company to adjust on the factors that favor continual current production and turning down outsourcing. The decision for BMC whether or not to produce is based on the comparison of the company’s cost and FEE cost, units manufactured by FEE having the same quality, delivery schedule having the same reliability as that of BMC and if there was additional capacity, proper decision will be to accept since it has a positive contribution. d) Space availability in relation to rented storage facilities, the cost and any other alternative use for the remaining factory floor space. e) Another factor in this scenario is that most managers have a tendency to focus on short term goals and brushing aside the long term goals since their reward is on short term accounting measures such as net income.

It is critical that the relevant cost analysis be supplemented by carefully considering both the long term and strategic concerns of the firm. Management can improperly use relevant cost analysis to achieve a short term benefit and suffer long term loss. In this scenario BMC may accept the deal with FEE simply because the company offers its product at a lower cost i.e. BMC Company produces at $425, while FEE Company unit price is $400 hence the difference is $25. Without considering that the nature of the deal will have a negative impact on the firm’s image in the market place and eventually negative effects on sales of the company products.

The most important issue for managers is to have strategic concerns in mind and also starting with the strategic objectives. Decision making process BMC has a choice of either to outsource or continue with the production and so the company has a choice to select one. In making such a decision, it must be systematic and not off the cuff (Hansen & Mowen, 2000). The management of BMC has to go through various process of decision making namely, Clarification of the decision problem The management is clear about the problem that is either to outsource or produce and the factors behind this include cost reduction, and whether it can solve the issue.

Management has to specify the criteria in which they are going to use to achieve the goal. For instance, what is the objective? When cost is reduced, will they have profit maximized? Or will the market share increase. The next step is to identify alternatives; Management should explore the alternatives available, their merits and demerits. This is the most important part in the decision making. In this case BMC Company has an option of discussing the deal that FEE Company has suggested to them.

The management should develop a decision model. In this stage only relevant factors to the problem are dealt with since it brings all other factors such as criteria alternatives and constraints together. Reference Hansen, D. R., & Mowen, M. M. (2000). Management accounting (5th ed.). Cincinnati: South-Western College Pub.