Summary
Decision-making is a fundamental aspect of any organization when choosing between two or more alternatives. Due to scarcity of resources, a wise decision has to be made and the best action is taken. The main objective is to minimize costs while at the same time increasing benefits to the organization. Therefore, an organization would be forced to employ tools and techniques designed with the motive of selecting the best alternative. This includes financial ratios and other important elements. In this regard, a number of issues might be vital for decision-making (Saldarini, 2000).
Relevant Costs Considered During Decision-Making
Mostly, cost-related aspects are weighed more than others such as benefits to society, employees and owners as they might lack monetary values. To begin with, a firm needs to identify whether the cost is different among the alternative options. If it is different, then the cost is relevant when it comes to making decisions. When two projects have the same costs, it means it will result in no effect if one chooses one option and leaves the other. The difference between the two costs is what forces one to leave one alternative and choose the other. For instance, Parser Limited was faced with cost differences when contemplating whether to take the two subcontractors from their usual department with a replacement cost of 32,000 or hire new subcontractors for the special order at a cost of 31,300. In this case, there was a cost difference of 700. Since the aim was to reduce costs, the firm opted for getting new subcontractors at a cost of 31300(Vance, 2003).
Historical costs have proved not to be relevant when making decisions as they have already happened and they can not be affected by the current and future decisions. However, historical costs might become relevant when one puts into consideration income taxes since the cash payments for income taxes depending on the tax basis of the assets (Walther, 2009).
If one can have a deep insight into sunk costs, he/she will realize sunk costs are not important when making a decision. For instance, the 7500 kg already existing in the stock had no effect on Parser Limited decision relating to special order as already money had been spent on it. Therefore, most sunk costs are assumed not to have an effect on future decisions (Drury, 2007).
Commonly, committed costs are taken to be part of sunk costs. The costs that are kept aside for some future activities and so one can not avoid such expenses. When one is making a decision, he/she does not consider committed costs. This means they cannot be affected by current and future decisions since they do not care how much value the contract will be created for the organization. It is assumed that cost has already been spent and therefore becomes a subset of sunk costs. Therefore, future costs and opportunities are the only relevant costs (Crosson & Needles, 2007).
In identifying the best option, one has to follow a series of sequential steps. The careful and critical analysis would lead to the best selection. At first, one has to define the decision to be made. Parser Limited’s decision is on undertaking a one-off contract. When so many options are available, think about the actions that need to be taken. These activities always require some costs. One has to move further and try to separate between opportunity costs, sunk costs and future costs. Sunk costs such as already bought materials are irrelevant. Opportunity costs become relevant as one foregoes one option in favor of another (Hansen & Mowen, 2006). For instance, Parser Limited sacrificed some 2000 hours for normal hour’s operation to spend on the special order contract. Future costs become even more relevant though they must be different between the various options. For example, a number of options emerge such as whether to hire subcontractors at 31,200 or get skilled employees from another department by replacing them with 32,000 for the whole period of undertaking the special order. Costs that appear not to be different should be ignored. Take an example where Parser Limited did not take into account the apportioned amount of 3000 for electricity when making the decision. As with relevant costs, one should choose the alternative with the lowest cost. In the end, one should consider the qualitative factors to ensure the option taken is more beneficial. This includes the convenience of machines, skills available among others (Adair, 2007).
Multinational Factors Considered in Decision-Making
For a multinational environment, further elements should be put into consideration. Consider BMC, which contemplates whether to manufacture Global Positioning System Navigator or outsource it from FEE, a Chinese company. Among the factors to be considered is the foreign exchange rate. If a product is to be outsourced from another country one needs to know how much he has to pay in that country’s currency. When foreign currency strengthens, it becomes expensive to pay for the foreign product. A high tax rate imposed for imports would mean producing domestically would be much worthy. The stability between the countries would mean outsourcing would not have many complications. For instance, the U.S.A. and China have a good relationship and many restrictions will not be there. With an unreliable and low-quality workforce, outsourcing might seem to be the best option. China is known for reliable and high skilled labor through the GPSN quality is considered equal for both countries. One would also choose to import or outsource if he/she can not access quality materials from his/her home country. Last but not least, one should also consider the reliability of transportation and communication. If there is reliable transportation from the foreign country then outsourcing will be convenient, as products would be delivered on time. Good communication will further ensure right products are delivered at the right time (Price, 1999).
References
Adair, J. (2007). Decision-making and problem-solving strategies. Philadelphia, Phila: Kogan Page Publishers.
Crosson, N. & Needles, B. (2007). Managerial accounting. New Jersey, NJ: Cengage Learning.
Drury, C., (2007). Management and cost accounting. Derby: Cengage Learning EMEA.
Hansen, D. & Mowen, M. (2006). Managerial accounting. New Jersey, NJ: Cengage Learning.
Price, E. (1999). Capital budgeting. Web.
Saldarini, K. (2000). Scholars tout the benefits of activity-based costing. Web.
Vance, D. (2003). Financial analysis & decision-making. New York, NY: McGraw-Hill.
Walther, L. (2009). Principles of accounting. New York, NY: Prentice-Hall.