Question

Am writing a term paper on relevance imformation for decision making with focus on price

Answer 1

Relevant Information depends on the decision being made. Decision making is essentially choosing among several alternative courses of action. Decision makers identify the available alternatives by search and screening process, carried out by a team that may include engineers, accountants, and other operating executives. The accountant is usually an information provider and help managers focus on the relevant information. He/she provides information that may be useful to the decision maker. However, the decision maker who has the best understanding of the decision and the available alternatives, must understand what information is relevant.

Relevant information is the predicted future costs and revenues that will differ among alternative courses of action.

Two criteria determine whether financial information is relevant,

1. Information must be expected future revenue or cost

2. It should have an element of difference among the alternatives

The Decision Process -

The above figure shows the decision model and process. Box 1(A) represents the historical data collected from the accounting system. Box 1B represents the other information such as price, industry stats etc. Both this data helps creation of prediction method in Box 2. After predicitons decision model comes place and inputs are taken. Decision model is any method used for making a choice. Thereafter managers takes decisions and those are implemented and evaluated. Feedback is used to make future adjustments to this decision process. From using this process one can focus on relevant information.

The degree to which information is relevant depends on the degree to which it is quantitative or qualitative. Qualitative aspects are those for which measurement in financial terms is difficult and imprecise. Quantitative aspects are those for which financial measurement is easy and precise. Accountants try to express in quantitative terms.

Construct absorption and contribution-margin income statements, and identify their relevance for decision making.

Absorption costing or Absorption approach - A costing approach that considers all indirect manufacturing costs (variable + fixed) to be product costs which becomes expense in form of manufacturing cost of goods sold.

Contribution approach - A method of internal reporting that emphasise the distinction between variable and fixed costs for the purpose of good decision making.

Basic Principles for Pricing Decisions :- One of the major decisions managers face is pricing. Pricing decisions can take many forms in addition to pricing special orders.

Pricing Decisions

Among the many pricing decisions to be made are,

- setting the price of a new or refined product line.

- responding to a new price of a competitor

- setting price of products sold under private or white label

- price bidding

There are two type of competitions, perfect and imperfect.

In perfect competition, a business can sell as much of a product as it can produce all at a single market price.

In imperfect competition, the price charged by business for a unit will influence the quantity it sells.

Influences of Pricing-

Several factors are considered by managers while making pricing decisions like,

- action of competitors

- demand of the customer

- legal requirements

Also, costs play important role in Pricing Decisions,

There are two pricing approach used by companies,

1. Cost plus pricing

2. Target costing