Question

The main role of Management Accounting is:
Planning
Control and
Decision making.
Decision making is the selection of the correct cost element and take the right decision in the best interest of the organization be:
-Make or buy decision
-Accept or reject decision
-Shut down decision
-Limiting factor decision
In relation to Decision making explain the above statement.

Answer 1

Solution to the above question:

Role of Management accounting in relation to decision making:

Make or buy decision:

Management accountants can evaluate the real cost for each product and can determine whether it's more appropriate to produce the products internally or buy them from the third party provider. This is the very sensitive decision which has the power either to make or break the business organisation as the product production is the most expensive segment of the business.

Accept or reject decision:

While deciding whether to accept or reject a decision, management must considered several factors. Some of these factors and underline as:

A) capacity required to fulfill the order

B) role of fixed cost

C) whether the price offered cost of production or not

D) various other qualitative factors.

Shut down decision:

The decision Whether to continue or shutdown a loss making segment of a business is very crucial. Shut down problems can be simplified by applying the principles of relevant costing. Theoretically, a business should discontinue any activity that does not generate sufficient funds to pay for its expenses in the long run.

Limiting factor decision:

Constraints in production process are the limiting factors which prevents a business from maximizing its sales. Some of the examples of limiting factors are: shortage in labour, medicine failure, shortage of raw materials, etc. Management has to take decisions on the basis of the various existing limiting factors so that it does not hamper the organisation.