KISHINCHAND CHELLARAM

COLLEGE
SYBBI
Management Accounting
Professor incharge
-Sanchita Roy

TEAM MEMBERS

NAME
KSHITIJA KHISMATRAO
MEGHNA KOTA
JYOTI PORRIYA
NISHA RATHORE
SHIBU YADAV

ROLL NO.
28
29
38
40
58

Accept or Reject Orders

Operate or Shutdown Business

INTRODUCTION

The process of decision making involves choices

of alternatives. Many quantitative and qualitative
factors are to be considered while taking
decisions.
A cost accountant examines each situation in
depth and decides the kind of cost concepts to be
used for decision making.

1. He must establish why a choice is necessary.

2. He must analyze each alternative separately.
3. Decide how each alternative influences choice of
decision maker.
4. Select the best course of action.

Decision making involves prediction .

It cant change the past, it is expected to influence
the future.
There are to type of decisions:1. Long-term decisions
2. Short-term decisons

DECISION MAKING

Decision making is the essence of management since it

may make or mark the success of the business as whole.
It means the process of choosing among alternative
course of action, since if there is no choice, there is no
decision making to make.
Every management decision deals with the futurewhether it be ten seconds ahead or eighty years
ahead . A decision always involves a prediction and is
risky factor.
They are generally of a crucial and critical nature on
account of their requiring huge investments and
involving much uncertainties and are unavoidable.

STEPS IN DECISION-MAKING
Defining the problem.
Identifying alternatives.
Evaluating quantitative factors.
Evaluating qualitative factors.
Obtaining additional information.
Selection of an alternative.
Appraisal of the results.

ACCEPT OR REJECT ORDERS

When additional order is accepted below normal

price, the manager should ensure that it does
not affect the goodwill of the company. While
considering foreign order, the benefits given by
the government should not be forgotten at the
time of determination of price. Such a decision
is made only when the local sale is earning profit
& the fixed cost is already covered in the local
market. In such a case, it the export price is
more than the marginal cost it is a advisable to
enter the export market. It will also utilize the
idle capacity.

ILLUSTRATION
Q. A company purchases 100 articles for home market at
the following cost:
Rs

Rs

materials

4000

wages

3600

Factory
Overheads:
Fixed

1200

Variable

2000

Administration
Overhead (Fixed)

3200
1100

Selling
overheads:
Fixed

1000

Variable
total

1600

2600
15200

The home market can consume only 100 units

at a selling price of Rs.155 per article. The
foreign market for this product can however
consume additional 400 units if the price per
unit is reduced to Rs.125.
Should the co. go in for foreign market at
Rs.125 per unit?

SOLUTION:

Statement of cost
Cost per unit
(Rs)
Material
Labour

40

Total on
additional
400 units (Rs)
16000

+36

+14400

=76

=30400

Factory

20

+8000

Selling

+16

+6400

=112

=44800

Sales

125

50000

Contribution

13

5200

Variable
overheads:

OPERATE OR SHUTDOWN

Differential cost analysis has to determine whether in

the short-run a firm is better off operating than not
operating. As long as the products sold recover their
variable costs and make a contribution towards the
recovery of fixed costs, it may be preferable to operate
and not to shut down. Also management should consider
the investment in the training of its employees which
would be lost in the event of a temporary shutdown.

Temporary shutdown:
The following items of costs and benefits should be considered
while deciding about the temporary shutdown of plant.
Items of cost:
Effect on fixed overhead costs.
Packing and storing of plant and equipment costs
Setting up costs
Loss of goodwill / market
Lay-off or retrenchment compensation to workers.

Items of benefits:
Saving in fixed costs
Avoiding operation losses
Saving in indirect costs such as repairs and maintenance,
indirect labour, heat and light costs, etc.

PERMANENT CLOSING DOWN:

A business is expected to earn a reasonable

return on its investment. In case the business is
not earning enough to compensate for the risk
involve it may be closed down permanently.
In order to decide whether to continue
operation or abandon the project altogether, a
compression should be made between the
revenue from continue operation and revenue
from complete closing down and sale of plant.
The business should close down if the amount
of revenue from continued of operations of the
business.

ILLUSTRATION
Fixed

cost

Producti capacity
on
(fixed

Costs +

Variable

Costs)

Close
down

Normal

40%

60%

80%

100%

Rs

Rs

Rs

Rs

Rs

Rs

Factory
overheads

6000

8000

10000

11000

12000

13000

Administratio
n Overheads

4000

6000

6500

7000

7500

8000

Selling and
distribution
overhead

4000

6000

7000

8000

9000

10000

Miscellaneous 1000

1000

1500

2000

2500

3000

Direct labour

10000

15000

20000

25000

Direct
material

12000

18000

24000

32000

15000

21000

47000

61000

75000

91000

 The

following additional information has been supplied to

you:
Present sales at 50% capacity are estimated at Rs.30, 000
per annum.
Estimated costs of closing down are Rs.4, 500. In addition
maintenance of plant and machinery is expected to amount
to Rs.800 p.a.
Cost of reopening after being closed down are estimated to
be Rs.2,000 for overhauling of machines and getting ready
and Rs.1,400 for training of personnel.
Market research investigations reveal that sales should take
an upward swing to around 70% capacity at prices which
would produce revenue of Rs.1, 00,000 in approximately
twelve months time.
You are required to advise the directors whether to close
down for twelve months or continue operations indefinitely.

SOLUTION:
STATEMENT OF PROFIT (LOSS)
Particulars
0

Percentage capacity

levels

50

70

Rs.

Rs.

30000

100000

(closedown)
Rs.
Sales
costs: (A)

NIL

CONTINUE..

Particulars

0
(Closedown)

Variable cost
Fixed cost

50%

70%

NIL

33000

47000

15000

21000

21000

23000

54000

68000

(23700)

(24000)

32000

Special shut down

cost :
Closing down

4500

Plant maintenance

800

Cost of reopening
and overhauling

2000

Training

1400

Total cost

Profit (loss)

(B)

8700