CPA Australia Foundation Management Accounting (Module 6) Summary Note
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Course
CPA Australia
Institution
CPA Australia
Looking to excel in your Management Accounting course and achieve your academic goals? Look no further than these comprehensive study notes! These notes are concise and structured (WITH CALCULATION WORKINGS) for Module 6 of the CPA Australia Foundation Management Accounting subject. (p.s, am sell...
M6:1 Introduction to Decision Making 1. Define the problem
● A decision is made only when a problem is recognized
1.1 Decision Making ● If the manager is unaware that a problem exists - they will not feel the
Decision making need to make any decision
● Always involves a choice between alternative courses of action
● Relevant and reliable information - critical to the decision-making process 2. Identify the decision-making criteria
● What are we trying to achieve?
Managers ○ Maximize profits over the next 12 months, given the available
● Managers at all levels within an organization make decisions resources and subject to limitations on the risks that should be
● Long term, short term, routine and occasional taken
● Have the role to provide information so that management can reach an ○ Reduce excessive spending
informed decision
● Supply the appropriate type of information
3. Develop alternatives
Choice between alternative courses of action ● The different ways in which the problem might be resolved in a way
● Comparing actual results against a target that is consistent with the decision-making criteria
● Corrective action may need to be taken
4. Analyze the alternatives
Budgeting ● Evaluated financially - to estimate the profit that would result from
● Choices between different ways of using an organization’s scarce resources (eg, choosing that alternative
cash, equipment and manpower) ● Other financial considerations taken into account too
Decision - making process 5. Select an alternative
● Selecting one alternative from 2 or more that have been analyzed
● The recommended choice should satisfy the goals of the organzation
, M6:2 Relevant Cost
Relevant costs Future cash flows arising as a direct consequence of a decision
Based on future, incremental cash flows
The value of the benefit sacrificed when one course of action is
chosen in preference to an alternative.
Differential cost
● The difference in total cost between alternatives
Opportunity cost
● The value of the benefit sacrificed when one course of
action is chosen in preference to an alternative.
Variable costs
Non - relevant Sunk cost
cost ● A past cost
● Not relevant in decision-making
Fixed costs
M 6:3 - Choice of product (product mix) decisions
,3.1 The Limiting Factor
Limiting factor
● Any factor which limits the organisation’s activities
● Contribution is maximised by earning the biggest contribution per unit of
limiting factor
Possible limiting factors:
● Sales - level of sales demand for a product
● Resources - scarce resources which limit production to below the level of
demand
● Labour - total quantity of labour available
● Labour - shortage of skilled of labour
● Materials - Insufficient available materials to produce enough units to satisfy
sales demand
● Manufacturing capacity - Insufficient machine capacity for production required
to meet sales demand
Contribution per unit of Maximised by earning the biggest contribution from
limiting factor each unit of limiting factor
Example:
If skilled labour is the limiting factor, contribution will
be maximised by earning the biggest contribution from
each hour of skilled labour worked
FORMULA:
Contribution per unit of limiting factor
= Contribution per unit/Limiting factor
M 6:4 - Make or buy decisions
Limiting factor decision ● Involves the determination of the contribution
earned by each different product from each
4.1 Introduction
unit of limiting factor
Make or buy problem
, ● Whether to make a product with its own internal resources or pay another
organization to make the product
Relevant costs to be decided
Differential costs
● Between the two options (sourcing internally and externally)
● The difference in total costs between alternatives
Variable costs vs. fixed costs
Example : whether or not a company should manufacture or buy its components
● Make option - more direct control over the work
● Buy option - external organization has a specialist skill and expertise in the work
Make or buy considerations
● How can spare capacity be freed up by the ‘buy’ option be used most profitably?
● Could the decision to use an outside supplier cause an industrial dispute?
● Would the subcontractor be reliable with the delivery times and product
quality?
● Does the company wish to be flexible and maintain better control over
operations by making everything itself?
M 6:5 - Outsourcing
5.1 Introduction
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