Unit 3: Short-Term Decision Making
This unit introduces a new way to evaluate costs and make management decisions. Rather than examining direct materials, direct labor, and manufacturing overhead, we rearrange this information as variable costs, fixed costs, and mixed costs (fixed and variable costs combined).
For example, in the previous unit we classified a factory worker who earns a salary and annual bonus based on company performance as direct labor. In this unit, we allocate salary to fixed costs, and the bonus to variable costs. We also explore how managers make short-term decisions (what needs to occur during the next hour, day, week, or year). Fixed cost restraints, such as plant size, equipment size, and age, often define short-term decisions.
Understanding how these three types of costs variables behave allows business managers to predict revenue, operating income, and changes in sales volume.
Completing this unit should take you approximately 6 hours.
In this unit you have identified costs as fixed, variable, or mixed. You then examined the behavior of costs to predict future financial patterns. The production of the contribution margin income statement is an important management decision making tool. In the next unit you move on to one of the most useful tools in the managerial accounting tool box cost-volume-profit analysis, or break-even analysis. Every manager needs to know how much has to be produced to generate a profit. A well done break even analysis will also respond to questions about what happens if one or more cost variables changed because you can estimate how sensitive profit is to any of these variables.