Accounting for Decision-Making
Core concepts
Decision accounting uses relevant costing and incremental analysis. Candidates must identify relevant costs and revenues (future, differential, avoidable), exclude sunk costs and allocated common fixed costs, and include opportunity costs. Typical decisions: special orders, make or buy, accept or reject, keep or discontinue a product line, sell or process further, and limited-resource allocation using contribution per unit of scarce resource. Support these with CVP, payback, accounting rate of return and simple net present value reasoning, and consider qualitative factors such as capacity, customer goodwill, quality, supplier reliability and strategic fit. Ethics and stakeholder impact belong in every recommendation.
Traps
Allocated fixed overhead usually persists whether or not a segment is dropped, so it is not relevant; only avoidable fixed costs count. A special order at a price below normal selling price can still be profitable if it covers variable cost and any incremental fixed cost and spare capacity exists. When a resource is scarce, rank products by contribution per limiting factor, not by contribution per unit or by selling price. For sell-or-process-further, ignore the joint cost already incurred and compare incremental revenue with incremental processing cost. Opportunity cost is added to the cost of the chosen alternative, not recorded as a transaction.
Worked example
A firm has 1,000 machine hours. Product A: contribution $30, 2 hours; Product B: contribution $40, 5 hours. Contribution per hour: A = $15, B = $8. Allocate all hours to A: 500 units x $30 = $15,000, against $8,000 for B. Rule of thumb: divide contribution by the scarce resource to rank options, then check demand limits and qualitative factors before recommending.