Question

give me example what qualitatve issues ,in general ,might "any combany" consider befor finalizing its decision?

I want examples for Qualitative factor in special order decisions to be clear for me by answer questions

1-will expect the same selling price per unit on future orders?

2-will other regular customers be upset if they discover the lower selling price to one of their competitors?

3-will employee productivity change will the increase in production?

4-given the increase in production, will the incremental cost remain as predicted for this special order?

5-are material available from its supplier to meet the increase in production?

Answer 1

While business decisions should be data-driven and usually involve consideration of quantitative financial information, that doesn't mean that qualitative information is not important as well. The goal of management accounting is to provide relevant information for decision-making. By understanding qualitative factors that should be examined when making managerial accounting decisions, you can make sure your small business is considering all of the ramifications of business decisions.

External Reputation

Small business owners should be aware how managerial-accounting-based decisions affect the external reputation of the firm. Often, quantitative analysis suggests a clear choice between two decision alternatives. However, this type of analysis does not always take into account all factors. For example, a manufacturing company may consider outsourcing the assembly of electronic parts overseas. While examining projected income statements outlining the quantitative effects of the change shows increased profitability, the analysis is unable to take into consideration consumer backlash related to moving jobs out of the U.S.

Labor Relations

Nearly any quantitative analysis will demonstrate that spending less money on employees increases profits. However, this may be shortsighted. Quantitative analysis usually does not take into account the importance of healthy relations with your labor force. For example, a company may decide that to save costs it will discontinue an annual holiday bonus that has been offered for the last 20 years. While there is no doubt that this will reduce costs, it could be perceived by employees as antagonistic or heartless. Small business owners may consider other ways to cut costs. In this case, it might be better to reduce annual pay increases by a fraction of a percent or to reduce the bonus rather than eliminate it.

Quality

In most cases, quantitative information neglects to provide information on quality. Businesses, smartly looking to reduce costs, must be cautious to avoid sacrificing the long-term benefit of being associated with quality products and services for the short-term quantitative benefit of cutting costs. For example, a clothing manufacturer may source thinner and lower cost denim for use in making jeans. Even if the company is able to pass some of these cost savings on to consumers, the association with lower quality products may be detrimental to the company.

Elements of a decision

A quantitative decision problem involves six parts:

a) An objective that can be quantified Sometimes referred to as 'choice criterion' or 'objective function', e.g. maximisation of profit or minimisation of total costs.

b) Constraints Many decision problems have one or more constraints, e.g. limited raw materials, labour, etc. It is therefore common to find an objective that will maximise profits subject to defined constraints.

c) A range of alternative courses of action under consideration. For example, in order to minimise costs of a manufacturing operation, the available alternatives may be:

i) to continue manufacturing as at present
ii) to change the manufacturing method
iii) to sub-contract the work to a third party.

d) Forecasting of the incremental costs and benefits of each alternative course of action.

e) Application of the decision criteria or objective function, e.g. the calculation of expected profit or contribution, and the ranking of alternatives.

f) Choice of preferred alternatives.

Relevant costs for decision making

The costs which should be used for decision making are often referred to as "relevant costs". CIMA defines relevant costs as 'costs appropriate to aiding the making of specific management decisions'.

To affect a decision a cost must be:

a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.

b) Incremental: ' Meaning, expenditure which will be incurred or avoided as a result of making a decision. Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision.

c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant.

Other terms:

d) Common costs: Costs which will be identical for all alternatives are irrelevant, e.g. rent or rates on a factory would be incurred whatever products are produced.

e) Sunk costs: Another name for past costs, which are always irrelevant, e.g. dedicated fixed assets, development costs already incurred.

f) Committed costs: A future cash outflow that will be incurred anyway, whatever decision is taken now, e.g. contracts already entered into which cannot be altered.