Strategic Decision-Making: Relevant Costs & Revenues
Effective Decision-Making for Long-Term Success
Effective decision-making involves making choices that support a company’s long-term aims. These decisions should help create value, generate profit, and meet customer and employee needs. Achieving these goals requires combining financial and qualitative information. Modern companies also recognize that motivated and committed team members make the best decisions. Finally, improved accounting technologies provide ‘relevant’ financial data, saving time in the decision-making process.
Relevant Costs and Revenues
Relevant costs are expected future costs, and relevant revenues are expected future revenues that differ among the alternatives being considered. To be considered relevant, revenues and costs must:
- Occur in the future.
- Differ among the alternative courses of action.
Qualitative and Quantitative Relevant Information
Managers divide decision outcomes into two main categories: quantitative and qualitative.
- Quantitative factors are outcomes measured in numerical terms.
- Qualitative factors are outcomes that are difficult to measure accurately in numerical terms (e.g., employee morale).
Potential Problems in Relevant-Cost Analysis
Decision-makers may encounter two potential problems when using relevant-cost analysis:
- Incorrect general assumptions, such as assuming all variable costs are relevant and all fixed costs are irrelevant.
- Unit-cost data can mislead decision-makers.
To avoid these problems, focus on (i) total revenues and total costs (rather than unit revenues and unit cost) and (ii) the relevance concept.
Insourcing vs. Outsourcing and Make-vs.-Buy Decisions
Outsourcing is purchasing goods and services from outside vendors, while insourcing is producing goods or services within the organization.
Opportunity Costs and Outsourcing
In practice, unused capacity can often be used for alternative purposes, which may be more profitable or beneficial. The choice, then, is not whether to make or buy, but how best to use productive capacity.
The Opportunity Cost Approach: Deciding to use a resource in a certain way means forgoing an opportunity to use it alternatively. Opportunity cost is the contribution to operating income that is foregone by not using a limited resource in its next best alternative use.
Cost Accounting and the Social Economy
Innovative companies in the social economy demonstrate the benefits of combining qualitative and financial goals and implementing participatory management.
What is the Social Economy and Why is it Important?
The social economy is a new sector of the global economy comprising cooperatives, social enterprises, associations, and foundations. These organizations aim to achieve profitability and a wide range of social goals, maximizing value creation. The social economy sector has continued to grow during economic crises while providing solutions to environmental and social challenges.