Accounting Learning & Online Communication - Chapter 8 Decision Making

This assignment explores the critical skill of decision-making in accounting, drawing parallels between real-life experiences and accounting concepts. The student discusses various aspects of decision-making, including the identification of relevant costs, sunk costs, and opportunity costs, illustrated with personal anecdotes. The assignment delves into the importance of contribution margin in short-term decisions and the application of capital budgeting tools like NPV and IRR for long-term investments. It highlights the significance of the time value of money and the limitations of payback period as an evaluation technique. The student emphasizes the need to consider both quantitative and qualitative factors in decision-making, drawing from their grandfather's experiences in the army. The assignment provides a comprehensive overview of decision-making in accounting, linking theoretical concepts with practical applications.

ACCOUNTING LEARNING & ONLINE COMMUNICATION
Chapter - 8
STUDENT ID:
[Pick the date]

Decision making is a critical skill which any manager needs to have. My grandfather was in
army and occupied several high ranking positions. He often told me that while the soldiers
fight, the pivotal decisions that decide whether they emerge victorious or lose their lives is
made off the field by the senior personnel. I can completely relate to that situation with the
position of managers in a corporate environment where the performance would be dependent
on the direction provided by the managers and top management.
It is interesting to note that decisions can be short term and long term based on the underlying
implications and timeframe over which the impact would be felt. A key aspect of these
decisions is to identify the relevant cost. Sometimes this can be quite difficult as I have seen
in my own experience. I once went to a casino with my father and we lost $ 100 in a slot
machine. Once we lost $ 100, my father said we need to get up even though he had more
money. I insisted that we have lost so many times and hence this time we would win.
However, he explained me that probability of success for every game has been the same and
will be the same irrespective of the past results. While reading about sunk cost, I could not
help but think about the episode. I wonder can we equate the two concepts?
Another concept which was quite interesting was opportunity cost. I have understood this
concept in my personal life when during my teens I did not focus on studies too much and my
father used to explain me how time was limited and hence I had to make the most. I now
realise that utilising my time for other activities implied that I could not devote enough time
on my studies and thus, this was the opportunity cost of my decisions. The contribution
margin is another imperative concept that the managers needs to consider especially because
the fixed costs remain constant. Therefore decision making needs to be prompted based on
whether the contribution margin is positive or negative. Relying on contribution margin can
be immensely useful when there are multiple products that can be produced using the limited
resources and decision is to taken with regards to the most efficient usage of resources. I
experienced this in personal life when I had to choose between two jobs. One of these jobs
was high paying but it was far from my residence and hence the gas costs were higher. When
I considered the same, I realised that my net income was higher in the job that paid me less
but was nearer. Besides, I also considered the opportunity cost of the time of travel.
With regards to long term decisions, usually a high amount of capital is required and hence
specialised capital budgeting tools are required. Most of these tools are based on the time
value of money which is a concept useful not only in professional life but also in personal

life. My friend once owed $ 1,000 which he had borrowed. He had promised me to return the
same within 3 months. But after three months, we came with the proposal whereby he offered
me $ 1,000 the next day or a stream of $ 100 over the next 12 months. I quickly used the
concept of time value of money to figure the better proposal. However, many individuals fail
to account the same which is a pivotal flaw considering that money like any other resource
has opportunity cost which ought to be considered.
The lapses in payback period as an evaluation technique is apparent since it focuses only on
recovering the initial investment and does not aim to recover the opportunity cost owing to
the money being invested in a project. As a result, it does come as a surprise that other
measures that take this concept into consideration such as NPV and IRR are considered
superior alternatives. It was interesting to note that NPV and IRR have key difference despite
both being based on a similar concept. Further, a key takeaway from the chapter was to
ensure that qualitative factors are also taken into consideration which is pivotal. My
grandfather shared his army experience whereby he always emphasized on experience as the
importance of experience lies with regards to understanding the qualitative aspects which are
difficult to objectively quantity and hence the underlying skill and experience of decision
maker is tested.