Relevant Information and Decision Making = Production Decisions - Review Notes

Many production decision models require accounting information.

Management accounting is branch of accounting wherein accountants provide data that helps in taking specific management decisions. Management has various subject based approaches and quantitative management decision making approach requires cost data for taking decisions using various optimization models. Decision making is future oriented and hence requires estimates of various costs for the future periods. But estimates of costs cannot be made and verified (for their accuracy) unless accounting system provides actual historical costs. Historical cost details provided by the accounting system can be modified for volume data and price expectations and estimates can be made more easily and accurately by operation personnel. Management cost objective related accounting work involves going through ledger data and summarizing the data that accurately reflects the cost elements that go into the cost objective in various transactions done by various departments of the organization.

Some of the decision models requiring cost data are:

1. Product mix determination: Requires revenue estimates and cost estimates to give profit estimates for each of the products considered for product mix determination.

2. Economic order quantity model (Purchase)

Simple economic order quantity formula is given by EOQ = SQRT (2AS/I)
where A = annual demand in units, S = order cost for each order issue and receipt and I = Inventory carrying cost per unit per annum.

To implement this model inventory control manager requires the estimates of ordering cost and inventory carrying cost.

3. Economic Order quantity model (Production)

The model is similar to purchase model. But now S is set up cost for the machine. To implement this model production planner or controller needs the estimate of set up cost for each machine. Management accountants have to take the set up cost for machine of each machine as cost objective and find out the set up cost.

4. Quality Cost

Quality cost model argues companies are incurring less cost in designing quality and preventing defects and are spending more in repairing defects and related losses. Management accountants have to take these cost ideas as cost objectives and prepare a statement showing cost of designing quality, cost of preventing defects and cost of actual defective parts. This data is going motivate the company management to increase investments in designing for quality and preventive devices or systems.

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