Decision Making

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MANAGERIAL DECISION MAKING 3

DecisionMaking

Thefirst managerial tool that assists in decision making is the costvolume analysis. It calls for the managers to keep close and controlvarious indicators of performance. They include the volume ofproduction, the selling prices for each unit of sales, the variablecosts per unit and the total fixed costs. Cost volume analysisenables managers to identify the contribution of each unit ofproduction to the profit of the firm. Besides, it allows theidentification of the breakeven point. The breakeven point is thepoint where the company is not making profits or losses. The value ofthe revenues is equal to the value of the income. The analysis helpsthe managers to decide the best course of action for the firm. Forexample, the managers can decide on the most appropriate price ofproducts bearing in mind the value of the costs involved in producinga given good or providing a service. Besides, the managers can decideon the best course of action to increase the profitability of thefirm: increasing the quantity of sales or increasing the price(Jerold, 2014).

Thesecond decision-making tool is analyzing opportunity costs.Opportunity costs are the costs incurred by an organization bypursuing one alternative at the expense of the other. They enablemanagers to choose between two alternatives that are independent. Theability to decide on the best options increases profitability as wellas the sustainability of the organization (Jerold, 2014).

Thethird decision-making approach is the determination of product andperiod costs. The two types of costs are particular especially formanufacturing organizations. Products costs are directly related tothe production of a given product. They include direct labor, machinehours and direct materials. In contrast, period costs areadministrative costs that are not directly related to the productionof a given product. The ability to distinguish between the twoassists in pricing as well as in evaluating the profitability of aparticular product (Jerold, 2014).

References

Jerold,Z. (2014). Accountingfor decision making and control. (8th ed.).Irwin, CA: McGraw Hill.

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