KISHINCHAND CHELLARAM COLLEGE

SYBBI

Management Accounting

Professor incharge -Sanchita Roy

TEAM MEMBERS NAME ROLL NO. KSHITIJA KHISMATRAO 28 MEGHNA KOTA 29 JYOTI PORRIYA 38 NISHA RATHORE 40 SHIBU YADAV 58

Accept or Reject OrdersOperate or Shutdown Business

INTRODUCTION The process of decision making involves

choices of alternatives. Many quantitative and qualitative factors are to be considered while taking decisions.

A cost accountant examines each situation in depth and decides the kind of cost concepts to be used for decision making.

1. He must establish why a choice is necessary.2. He must analyze each alternative separately.3. Decide how each alternative influences

choice of decision maker.4. Select the best course of action.

Decision making involves prediction . It cant change the past, it is expected to

influence the future. There are to type of decisions:-1. Long-term decisions2. Short-term decisons

DECISION MAKING

Decision making is the essence of management since it may make or mark the success of the business as whole. It means the process of choosing among alternative course of action, since if there is no choice, there is no decision making to make.

Every management decision deals with the future- whether it be ten seconds ahead or eighty years ahead . A decision always involves a prediction and is risky factor.

They are generally of a crucial and critical nature on account of their requiring huge investments and involving much uncertainties and are unavoidable.

STEPS IN DECISION-MAKING

Defining the problem.Identifying alternatives.Evaluating quantitative factors.Evaluating qualitative factors.Obtaining additional information.Selection of an alternative. Appraisal of the results.

ACCEPT OR REJECT ORDERS

When additional order is accepted below normal price, the manager should ensure that it does not affect the goodwill of the company. While considering foreign order, the benefits given by the government should not be forgotten at the time of determination of price. Such a decision is made only when the local sale is earning profit & the fixed cost is already covered in the local market. In such a case, it the export price is more than the marginal cost it is a advisable to enter the export market. It will also utilize the idle capacity.

ILLUSTRATION Q. A company purchases 100 articles for home

market at the following cost: Rs Rs

materials 4000

wages 3600

Factory Overheads:

Fixed 1200

Variable 2000 3200

Administration Overhead (Fixed)

1100

Selling overheads:

Fixed 1000

Variabletotal

1600 260015200

The home market can consume only 100 units at a selling price of Rs.155 per article. The foreign market for this product can however consume additional 400 units if the price per unit is reduced to Rs.125.

Should the co. go in for foreign market at Rs.125 per unit?

SOLUTION:- Statement of cost

Cost per unit (Rs)

Total on additional400 units (Rs)

Material 40 16000

Labour +36 +14400

=76 =30400

Variable overheads:

Factory 20 +8000

Selling +16 +6400

=112 =44800

Sales 125 50000

Contribution 13 5200

OPERATE OR SHUTDOWN Differential cost analysis has to determine

whether in the short-run a firm is better off operating than not operating. As long as the products sold recover their variable costs and make a contribution towards the recovery of fixed costs, it may be preferable to operate and not to shut down. Also management should consider the investment in the training of its employees which would be lost in the event of a temporary shutdown.

Temporary shutdown: The following items of costs and benefits should be

considered while deciding about the temporary shutdown of plant.

Items of cost: Effect on fixed overhead costs. Packing and storing of plant and equipment costs Setting –up costs Loss of goodwill / market Lay-off or retrenchment compensation to workers.

Items of benefits: Saving in fixed costs Avoiding operation losses Saving in indirect costs such as repairs and

maintenance, indirect labour, heat and light costs, etc.

PERMANENT CLOSING DOWN:

A business is expected to earn a reasonable return on its investment. In case the business is not earning enough to compensate for the risk involve it may be closed down permanently.

In order to decide whether to continue operation or abandon the project altogether, a compression should be made between the revenue from continue operation and revenue from complete closing down and sale of plant. The business should close down if the amount of revenue from continued of operations of the business. 

ILLUSTRATION Fixed cost Produc

tion capacity

(fixed Costs +

Variable

Costs)

Close down

Normal 40% 60% 80% 100%

Rs Rs Rs Rs Rs Rs

Factory overheads

6000 8000 10000 11000 12000 13000

Administration Overheads

4000 6000 6500 7000 7500 8000

Selling and distribution overhead

4000 6000 7000 8000 9000 10000

Miscellaneous

1000 1000 1500 2000 2500 3000

Direct labour

- - 10000 15000 20000 25000

Direct material

- - 12000 18000 24000 32000

15000 21000 47000 61000 75000 91000

The following additional information has been supplied to you:

Present sales at 50% capacity are estimated at Rs.30, 000 per annum.

Estimated costs of closing down are Rs.4, 500. In addition maintenance of plant and machinery is expected to amount to Rs.800 p.a.

Cost of reopening after being closed down are estimated to be Rs.2,000 for overhauling of machines and getting ready and Rs.1,400 for training of personnel.

Market research investigations reveal that sales should take an upward swing to around 70% capacity at prices which would produce revenue of Rs.1, 00,000 in approximately twelve months’ time.

You are required to advise the directors whether to close down for twelve months or continue operations indefinitely.

SOLUTION: STATEMENT OF PROFIT (LOSS)

Particulars

Percentage capacity

levels

0 50 70

(closedown)

Rs. Rs. Rs.

Sales costs: (A)

NIL 30000 100000

CONTINUE..

Particulars 0(Closedown)

50% 70%

Variable cost NIL 33000 47000

Fixed cost 15000 21000 21000

Special shut down cost :

Closing down 4500

Plant maintenance

800

Cost of reopening and overhauling

2000

Training 1400 8700

Total cost (B) 23000 54000 68000

Profit (loss) (23700) (24000) 32000