Decision Making: Role In Managerial Decision-Making

Role in managerial decision making

Differential costing considers relevant costs that changes as a result of a decision. Management rely on the incremental or differential costing system in decision making. Following are the decisions that are usually being answered by applying the differential costing technique: Will it be profitable to process a product further? Will an asset replacement be profitable? If a new sales territory can be explored? Whether new products can be launched profitably?

Differential cost analysis requires the identification of costs and revenues that varies with each alternative. Decisions are taken based on the incremental revenue generated in each situation. Management chooses the alternative with the highest profit. if only differences are with the costs, the management will chose the

Under this system, standard costs are determined and actual costs are compared with them.

According to CIMA (Chartered Institute of Management Accountants), standard costing is defined as the “preparation of standard costs and applying them to measure the variations from actual costs and analysing the courses of variations with a view to maintain maximum efficiency in production”.

John Lewis Brown and Leslie Reginald Howard (authors - Principles and Practice of Management Accountancy), defined standard costing as a “technique of cost accounting which compares the standard cost of each product or service with the actual costs, to determine the efficiency of the operations so that any remedial action may be taken immediately”.

According to British Author Joseph Batty, “Standard costing is a system of cost accounting which is designed to show in detail how much each product should cost to produce and sell when a business is operating at a stated level of efficiency and for a given volume of output”.

Standard costing has the following