W5 Assignment Application Problems 5, Page 298 Brief Exercis

W5 Assignment Application Problems 5page 298 Brief Exercises 7

Identify the order in which the steps in management’s decision-making process should be executed:

- Make a decision

- Review results of the decision

- Identify the problem and assign

- Determine and evaluate possible responsibility courses of action

Compare Alternative A and B for Bogart Company, showing incremental revenues, costs, and net income:

- Alternative A: revenues of $160,000; costs of $100,000

- Alternative B: revenues of $180,000; costs of $125,000

Evaluate each statement about decision-making and incremental analysis as true or false. Correct the false statements:

1. The first step is “Determine and evaluate possible courses of action.”

2. The final step is to actually make the decision.

3. Accounting primarily contributes to evaluating options and reviewing results.

4. Management considers only financial information because it's objectively determined.

5. Decisions involve choosing among alternative courses.

6. The process to identify financial data that change under alternatives is called incremental analysis.

7. Costs the same under all options sometimes influence decisions.

8. In incremental analysis, some costs change, but revenues do not necessarily.

9. Variable costs change under alternatives, fixed costs may not.

Anna Garden must choose between two basketweaving kits due to space limitations:

• The basic kit costs $16 (cost) and sells for $30.
• The Stage 2 kit includes dyed, cut reeds, sold at $36.
• Producing the Stage 2 kit involves using basic materials and adding one hour of Anna's time, valued at $18/hour. She can produce two Stage 2 kits from one basic kit in one hour.

Conduct an incremental analysis to determine which kit Anna should carry, considering costs, prices, and production efficiency.

Paper For Above instruction

The decision-making process in management is a structured approach that guides managers through identifying problems, evaluating alternatives, and selecting the most appropriate course of action. The steps involved are essential for effective management and include: first, identifying and understanding the problem; second, generating and evaluating possible responsibility courses of action; third, making the decision; and finally, reviewing the outcomes of that decision to inform future judgements. Proper sequencing of these steps ensures that decisions are based on thorough analysis and aligned with organizational goals.

In managerial accounting, incremental analysis serves as a crucial tool for decision-making, especially when comparing alternatives. For Bogart Company, a comparison of alternative A ($160,000 revenue, $100,000 costs) versus alternative B ($180,000 revenue, $125,000 costs) reveals that the additional revenue of $20,000 is offset by an extra $25,000 in costs. Thus, alternative B results in a lower net income by $5,000 compared to A, indicating that without additional strategic considerations, alternative A might be more favorable despite lower revenues.

Evaluating statements related to decision-making and incremental analysis helps clarify fundamental principles. Statement 1 correctly states that the first step is to determine and evaluate possible courses of action; thus, it is true. Statement 2 posits that making a decision is the final step, which is also accurate, as the process concludes with action. Statement 3 correctly emphasizes the role of accounting in evaluating options and reviewing results, which underscores the contribution of financial data to decision efficacy. Conversely, Statement 4 claims that management only considers financial information because it is objectively determined, but qualitative factors often influence decisions and should not be overlooked, making it false and requiring correction to include non-financial considerations.

Statements 5 through 9 focus on aspects of incremental analysis. It is true that decisions involve a choice among options. The process used to identify influencing financial data is termed incremental analysis, which isolates cost and revenue differences among alternatives. Fixed costs that do not change between options generally do not impact decisions directly, but if they are avoidable or relevant to the decision, they should be considered. Variable costs typically change with the choice of alternative, emphasizing their importance in incremental analysis. Some costs, such as fixed costs that are unavoidable, may not affect the decision process. Accurate understanding of these principles ensures managers analyze relevant data effectively.

Anna’s basketweaving studio presents an illustration of short-term decision-making involving resource constraints. Carrying the basic kit costs $16 in materials, selling for $30, resulting in a profit of $14 per kit. The Stage 2 kit, made from the basic kit plus an hour of Anna's labor valued at $18, adds efficiency by transforming raw materials into a more valuable product. Her ability to produce two dyed kits per basic kit in an hour introduces an incremental benefit worth $36 minus the costs involved, including the value of her time.

The total resource cost for the Stage 2 kit encompasses the initial materials plus labor costs, totaling $16 (materials) + $18 (labor) = $34, and it sells for $36, yielding a profit of $2 per unit. Conversely, the basic kit yields a profit of $14 per unit but involves more effort from the customer. Given Anna’s productivity and labor valuation, producing the Stage 2 kits offers a higher per-unit profit margin when factoring in opportunity costs, despite the lower gross profit per unit in raw material costs. Therefore, from a financial standpoint, focusing on the Stage 2 kits maximizes her overall profit, especially considering her ability to produce them efficiently and the higher selling price.

In conclusion, systematic and incremental approaches to management decision-making enable managers to make informed and profitable choices. By thoroughly analyzing costs, revenues, and resource limitations—whether choosing between product variations or strategic initiatives—organizations enhance their ability to compete effectively and adapt to changing circumstances.

References

• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Hansen, D. R., & Mowen, M. M. (2018). Cornerstones of Managerial Accounting. Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2020). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Managerial Accounting: Tools for Business Decision Making (8th ed.). Wiley.