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Chapter 6 Notes

by: Kaitlyn West

Chapter 6 Notes BUS-A 202/207

Kaitlyn West
GPA 4.0
Introduction to Managerial Accounting (HON)
Geoffrey Sprinkle

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About this Document

Notes for Chapter 6: Short Term Decision Making
Introduction to Managerial Accounting (HON)
Geoffrey Sprinkle
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This 2 page Class Notes was uploaded by Kaitlyn West on Friday February 27, 2015. The Class Notes belongs to BUS-A 202/207 at Indiana University taught by Geoffrey Sprinkle in Winter2015. Since its upload, it has received 39 views.


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Date Created: 02/27/15
Chapter 6 Decision Making in the Short Term Characteristics of Short Term Decisions 1 Temporary gaps between the demand and supply of available capacity A Fixed Supply of Capacity 1 Capacity is the maximum volume of activity that a company can sustain with available resources a The decision of how much capacity to put in place is a longterm decision i Based on expected volume of operations over a horizon spanning many years ii Not easy to change capacity levels B Demand Changes Frequently 1 There are unavoidable temporary imbalances between the demand and supply or organizational resources a We can t change supply in the short term b Demand varies in the short term c Excess Demand or Excess CapacitySupply C Closing the Gap Between Demand and Supply 1 Some companies have standby machinery only used during times of heavy demand 2 Some companies anticipate times of excess demand and build up their inventories 3 Business can rarely match supply and demand all of the time 4 Decisions that deal with excess supply a Reducing prices running promotions special orders 5 Decisions that deal with excess demand a Increasing prices outsourcing production altering the product mix 6 Most short term decisions have longer term implications ll Evaluating Options A The principle of relevance guides us in identifying the costs and bene ts that we need to consider Opportunity cost of excess supply is zero because there is no other pro table use for available capacity With excess demand it becomes necessary to forego some pro table uses of available capacity Relevant Cost Analysis focusing on relevant costs When the status quo is a feasible option all controllable costs and bene ts for the other options become relevant PU WU F IncrementalDifferential Analysis AKA relevant cost analysis G Total or Gross Approach including some or all of the costs and revenues in their calculations even though some of them are not controllable and do not differ across oonns 1 Considers gross revenues and costs 2 Results in same ranking order Additional Examples of ShortTerm Decisions A Evaluating ShortTerm Promotion Decisions 1 Emphasize Institutional Sales 2 Issue a Rebate B MakeVersusBuy Decisions 1 Must consider whether the rm is at capacity or not in these decisions


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