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I would like to thank our college for giving us the opportunity to deal with project as a part of B.COM (H) curriculum. I would like to take this opportunity to express our humble gratitude to our respected professors, for the creative support and motivation we received from them. It was very reflective learning with them and I am sure it will be very helpful in my further studies and fields of work. I am grateful to them as they helped me in all necessary requirements of my project. Thus, this is my sincere thanks to the professor for the guidance and support and for imparting me with great knowledge. I also extend my heartfelt thanks to my family and well wishers. Thanking you Surabhi jain



When you have a choice between two or more alternatives and you have to select one, you are making a decision. If there is no choice, you will have to simply follow or obey. So a decision implies a selection, a choice, a verdict or a nod. In everyday life, decisions are made. A personal decision affects an individual but organizational decisions cause a change, good or bad, to a lot many people known as stakeholders. So decision making in an organization must be systematic and not off the cuff. A good executive must be good at decision making. Decision making can be regarded as an outcome of mental processes leading to the selection of a course of action among several alternatives. Every decision making process produces a final choice. The output can be an action or an opinion of choice. It may be noted that every decision involves a certain degree of risk. Very few decisions are made with absolute certainty. So a good decision would be to choose a solution with the highest probability of success and in accordance with the goals, desires, lifestyle and values etc.


Relevant means linked or concerned. If an event has nothing to do with a situation, it is not relevant. Marble processing units at Karachi may suffer because of unrest in a far-off area like Swat. It would be relevant as Swat supplies marble rocks. But turmoil in

Hyderabad, a town much near to Karachi than Swat, would be irrelevant for the marble units. Any decision must be evaluated under cost-benefit criteria. The benefits must be more than the cost except in social projects where benefits may be equal to cost. Benefits can be in the form of cash return, perks, advantages, customers satisfaction or reputation of a company. While cost means value, worth or sacrifice made. A management accountant is a member of cross functional team and, having un-restricted access to MIS, makes a contribution by providing facts and figure which bring objectivity to the report. Besides, a management accountant would ensure that the information must be relevant (pertinent to the decision problem); accurate (precise); and timely (arrive in time for the decision to be made). Companies will occasionally trade-off accuracy for timeliness.


1. Clarify

the decision problem. One must be clear about the problem. One must look for the root cause or hidden problem rather than the apparent problem. 2. Specify the criteria. After clarifying a problem, criteria must be specified for decision-making. What is the objective: maximize profit, increase market share or social service. 3. Identify alternatives. Explore all alternatives, their pros and cons. This is a critical step in the decision making process. 4. Develop a decision model. This is a simplified version of the problem. No irrelevant information, only factors relevant to the

problem is highlighted. It brings together all elements of a problem like the criteria, the constraints, and the alternative. 5. Collect the data. Relevant data must be collected to incorporate objectivity in the process. It may be primary data or secondary data. But it must be up-to-date, timely and accurate. 6. Select an alternative. One all formalities are completed, requisite information obtained and processed, a most suitable or appropriate choice should be selected.

In order to qualify for relevancy, a cost must meet two criteria: (i) They affect the future and (ii) they differ among alternatives. Normally, the following are relevant Costs:

A differential cost is the difference in cost items under two or more decision alternatives specifically two different projects or situations. Where same item with the same amount appears in all alternatives, it is irrelevant. For example, a plot of land can be used for a shopping mall or entertainment park. The plot is irrelevant since it would be used in both the cases. Similarly, future costs and benefits that are identical across all decision alternatives are not relevant.


Where as differential cost is a difference between the cost of two independent alternatives, incremental or marginal cost is a cost associated with producing an additional unit. In case of a university, it could be cost of admitting another student. Even operating a second shift is an example of incremental cost. It would be noted

that the two decisions are not independent as second shift depends upon first shift.

It is cost of opportunity foregone. Farhana is a fresh graduate from a business university. She got two offers, one of Rs.25,000 from an investment bank and another of Rs.15,000 for a teaching-assistant in a university. Another of her class-fellow, Shabana got the same offer from the same university. While Shabana would be happy to join the university, Farahan would not as she would lose an opportunity to serve at the bank for Rs.25,000.

Sunk costs are past costs. These cannot be changed with any future decision. Suppose, a piece of land has already been purchased by a company for a sum of Rs.30 million. Also suppose, the company is consider covering it with a wall which would cost Rupees two million. While the sum of Rs.30 million is a sunk cost, the other of Rs.2 million is a future cost or out of pocket expenses. It is relevant to decision: whether to erect a wall now or postpone it for the next month, whether it should be two-meter or three-meter high. Whether a wall is erected or not and, if erected, whether it is 2 or 3 meter, the sum of Rs.30 million for land would remain the same. It is a sunk cost and therefore irrelevant to the decision. Similarly, a cost which is identical in all decisions is irrelevant.


Under marginal costing, fixed costs are ignored and price is determined on the basis of variable costs (marginal). In normal business conditions, the price fixed must cover full costs otherwise firm will incur losses. In certain circumstances like trade depression, dumping, seasonal fluctuation in demand, highly competitive market etc. pricing is fixed with the help of marginal costing rather than full costing. During trade depression, the price may go down even below the full cost of the product. In such case, the management has to decide whether to close down the production activities until the recession is over or continue the production activities. In case, the production activities are closed down, the firm will incur loss equal to its fixed cost or un-escapable costs. The main emphasis of management is to minimise its losses. The firm should continue its production activities so long as the selling price is more than the marginal costs because any contribution earned will help in recovery of the fixed costs which results in reduction of loss. Dumping means selling the product in foreign market at a price less than its total cost. The firm recover its fixed cost from the domestic market and marginal cost of the product becomes the basis for price fixation. Similarly if the firm produces product of seasonal demand or perishable goods marginal costing is more useful technique than full costing. EXAMPLE: Fixed Cost Variable Cost Current market price

Rs. 100000 Rs. 7 per unit Rs. 8 per unit

Output Should company sell or not? Solution: Variable Cost (50000 units@ Rs. 7) Fixed Cost Total Cost

50000 units

Rs. 350000 100000 450000

Cost per unit = Rs. 450000/50000 units = Rs. 9 Although the selling price does not cover the total cost, yet it is wise to continue to produce and sell because such a step will reduce the loss (on account of fixed cost) that will be incurred if production is stopped. If production is stopped, the loss would be Rs. 100000 (the amount of fixed cost), but if production is continued the loss will be as follows: Sales (50000 units @ Rs. 8) Rs. 400000 Less: Total cost (Marginal cost+Fixed cost) Rs. 450000 Loss Rs. 50000 Thus, by continuing to produce and sell at below total cost, the loss is reduced by Rs. 50000, i.e, from Rs. 100000 to Rs. 50000.


Sometimes, a company is not able to fully utilize plant capacity when selling at total cost plus profit basis. In such a case, it may explore new markets and find opportunities to receive additional bulk order or export order at a price which may be below total cost but above variable cost so that the price makes a contribution. The entire amount of contribution form such sales is profit because fixed cost is already recovered from current sales at total cost plus profit

basis. Such additional sales at below total cost is possible only because in accepting bulk orders and export sales, price discrimination is possible. In this way spare plant capacity can be utilized to earn additional profit. Additional Order for Utilizing Spare Capacity: When a company has a spare (or idle) capacity which it is not able to utilize because of sales constraint and it receives a bulk order at below normal selling price, such an order should be accepted, and provided existing sales are not affected by price discrimination. It will earn the company additional profit, by utilizing spare capacity. Export Sales: Additional orders may be accepted from a foreign market at below normal price or below total cost but above marginal cost. Export sales yield additional contribution when such sales are at a price which is above variable cost. While determining profitability of accepting export orders, the following additional factors should be considered. Export sales may result in additional costs like special packing cost, additional quality checks, freight and insurance charges etc..., if not borne by importer. These costs should be deducted from contribution to determine profit from export order.

Export sales may result in certain cost benefits like export subsidy from government , exemption or concessions in excise duty or duty drawbacks, etc.. In determining profit from export order, these items should be deducted from cost or added in contribution.

EXAMPLE: Indo-British Company has a capacity to produce 5000 articles but actually produces only 2000 articles for home markets at the following costs. Materials Wages Factory Overheads Rs. 40000 36000 12000 20000 18000 10000 16000 152000

-Fixed -Variable Administration Overheads -Fixed Selling and Distribution -Fixed Overheads -Variable Total Cost

The home market can consume only 2000 articles at a selling price of Rs. 80 per article. An additional order for the supply of 3000 articles is received from a foreign country at Rs.65 article. Should this order entails an additional packing cost of Rs.3000. Solution:

Statement of Marginal Cost and Contribution (Of 3000 articles for export)

Materials @ Rs. 20 per article 60000 Wages @ Rs. 18 per article 54000 Variable Overheads Factory @Rs. 10 per Article 30000 -Selling and dist. @ Rs. 8 per article 24000 Marginal Cost of sales 168000 Sales (3000 articles @ Rs. 65) 195000 Contribution 27000 Less: Additional Packing Cost 3000 Additional profit 24000 Acceptance of this export order results in additional profit of Rs. 24000 and thus the order should be accepted.


The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or partor significantly modified a product or partis having trouble with current suppliers, or has diminishing capacity or changing demand. Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage.

An enterprise may decide to purchase the product rather than producing it, if is cheaper to buy than make or if it does not have sufficient production capacity to produce it in-house. With the phenomenal surge in global outsourcing over the past decades, the make-or-buy decision is one that managers have to grapple with very frequently.

Factors that may influence a firm's decision to buy a part rather than produce it internally include lack of in-house expertise, small volume requirements, desire for multiple sourcing, and the fact that the item may not be critical to its strategy. Similarly, factors that may tilt a firm towards making an item in-house include existing idle production capacity, better quality control or proprietary technology that needs to be protected. The make-or-buy question represents a fundamental dilemma faced by many companies. Today's global competition forces manufacturing companies to re-evaluate their existing processes, technologies, manufactured parts and services in order to focus on strategic activities. However, companies have finite resources and may not be able to afford to have all activities in-house. This has resulted in an increasing awareness of the importance of the make-or-buy decision, the dilemma organizations face when deciding between keeping technologies/processes in-house or purchasing them from an outside supplier the ability to make such decisions in a structured and rational manner is likely to improve a company's overall performance.


Rani and Co. manufactures automobile accessories and parts. The following are the total processing costs for each unit. (Rs.) Direct material cost 5,000 Direct labour cost 8,000 Variable factory overhead 6,000 Fixed cost 50,000 The same units are available in the local market. The purchase price of the component is Rs. 22,000 per unit. The fixed overhead would continue to be incurred even when the component is bought from outside, although there would be reduction to the extent of Rs. 2,000 per unit. However, this reduction does not occur, if the machinery is rented out. Required: (A) Should the part be made or bought, considering that the present capacity when released would remain idle? (B) In case, the released capacity can be rented out to another manufacturer for Rs. 4,500 per unit, what should be the decision?

Solution: (A) The present capacity when released would be remain idle

Statement showing the cost to make or buy

Cost Element per unit Direct Material Direct Labour Variable Factory Overheads Purchase Price Reduction in Fixed Cost per unit 5000 8000 6000 Make Buy

19000 22000 (2000) 20000


Since the cost to make is less than the price to buy, it is desirable to manufacture the component as the idle capacity is not, alternatively, used.

(B) Statement showing costs of two alternatives, when released capacity is rented out
Cost Element per unit Relevant cost to make Purchase Price Related Income from alternative use per unit Total Relevant Cost Make 19000 Buy 22000 (4500)



In the above situation, the decision is in favour of buying from outside.


The product mix of a company, which is generally defined as the total composite of products offered by a particular organization, consists of both product lines and individual products. A product line is a group of products within the product mix that are closely related, either because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. A product is a distinct unit within the product line that is distinguishable by size, price, appearance, or some other attribute. For example, all the courses a university offers constitute its product mix; courses in the marketing department constitute a product line; and the basic marketing course is a product item. Product decisions at these three levels are generally of two types: those that involve width (variety) and depth (assortment) of the product line and those that involve changes in the product mix occur over time. The discussion on selection of most profitable product mix may be discussed in two parts: (a) when there is no key factor (b) when there is a key factor (a) When there is no key (limiting) factor: When there is no key factor, the product mix that provides the highest amount of contribution is considered as the most profitable sales mix. This holds good when fixed cost does not change due to changes in sales mix. However, when changes in sales mix are associated with changes in fixed cost, then that sales mix which provides the highest profit

is considered as the most profitable sales mix. In other words, relative profitability of mixes will be evaluated on the basis of their profit and not on the basis of their contribution when a change in product mix is associated with change in fixed cost.

EXAMPLE: The following production/sales mixes are capable of achievement in a factory: (i) (ii) (iii) 2000 units of product A and 2000 units of product C. 4000 units of product B 1000 units of product A, 2000 units of product B and 1600 units of product C. B 16 10 C 40 20

Cost per units is as follows: A Direct Materials (Rs.) 20 Direct Wages (Rs.) 8

Fixed Cost is Rs. 20000 and variable overheads per unit of A, B and C are Rs.2, Rs.4 and Rs. 8 respectively. Selling Prices of A, B and C are Rs. 36, Rs. 40 and Rs.100 per unit respectively. Determine the marginal contribution per unit of A, B and C and the profits resulting from product mixes (i), (ii) and (iii).

Marginal Cost Statement Per unit of products

Selling price (S) Direct Material Direct Wages Variable overhead Variable cost (V) Contribution (S V) Sales (i) A 2000 units C 2000 units (ii) B 4000 Units

A (Rs.) 36 20 8 2 30 6

B (Rs.) 40 16 10 4 30 10

C (Rs.) 100 40 20 8 68 32

Statement Showing Comparative Profitability Contribution Total Fixed Profit Contribution Cost 12000 64000 40000 76000 40000 20000 20000 56000 20000

(iii) A 1000 Units 6000 B 2000 Units 20000 C 1600 Units 51200




Conclusion: The sales mix (iii) is the most profitable as it yields the highest amount of contribution and profit.


When there is a key factor

When a key factor is operating, selection of the most profitable sales mix is based on contribution per unit of key factor. The product which makes the highest amount of contribution per unit of key factor is the most profitable one and its production is pushed up. The second preference is to be given to product which yields the second highest contribution per unit of key factor and so on and in the end that product should be produced which yields least contribution per unit of key factor and to the extent of availability of the key factor. In case a number of key factors are operating simultaneously, the basic principle remains the same but problem becomes more mathematical in nature and one has to resort to Linear Programming to determine the optimal product mix.

EXAMPLE: A company manufactures three products. The budgeted quantity, selling prices and unit costs are as under: A (Rs.) Raw materials (@Rs. 20per kg) Direct Wages (@Rs. 5 per hour) Variable Overheads Fixed Overheads 80 5 10 9 B (Rs.) 40 15 30 22 C (Rs.) 20 10 20 18

Budgeted Production(in units) 6400 Selling price per unit 140

3200 120

2400 90

Required: (i) Present a statement of budgeted profit (ii) Set optimal product mix and determine the profit, if the supply of raw materials is restricted to 18400 kg.

(i) Statement of budgeted profit A
Budgeted production (units) Selling Price (Rs,) Sales (S) Raw materials Direct Wages Variable Overheads Total Variable Cost (V) Contribution (S-V) Less: fixed cost* PROFIT 6400 140 896000 512000 32000 64000 608000 288000

3200 120 384000 128000 48000 96000 272000 112000 2400 90 216000 48000 24000 48000 120000 96000

Total Rs.

1000000 496000 171200 324800

*Calculation of fixed cost:

A=6400 units* Rs.9 B=3200 units*Rs.22 C=2400 units* Rs.18 Total fixed cost

= Rs. 57600 70400 43200 Rs. 171200


When raw material is the key factor 4 kg 6400*4 =25600 A B 2 kg 1 kg 3200*2 2400*1 =6400 =2400 C

Raw material per unit of output Total raw material consumed (kg)

Rs.288000 Rs. 112000 Rs.96000 25600 kg 6400 kg 2400 kg Rs. 11.25 III Rs.17.50 II Rs. 40 I

Ranks: *Contribution per kg of raw material is calculated as: Total contribution/Total raw materials consumed Suggested sales mix (raw material is the key factor) Rank I Product C- 2400 units * 1 kg =2400 kg Rank II Product B- 3200 units * 2 kg = 6400 kg Rank III Product A- 2400 units * 4 kg (balance) = 9600 kg Total materials available 18400 kg Thus the suggested product mix is: A-2400 units, B- 3200 units and C- 2400 units