7RQ - Horngren'S Financial And Managerial Accounting

Question

What are the two keys in short-term decision making?

Step-by-Step Solution

Answer

The two keys in short-term decision making are:

• Revenues, costs, and profits.
• Utilization of contribution margin approach.

Step 1: Meaning of Business

The term business refers to an entity established by law through the association of individuals or groups with an intent to perform ethical commercial activities for generating revenues and profits.

Step 2: The keys in making short-term decisions

In short-term decision-making, the two keys are as follows:

1. The administration should concentrate on the relevant revenues, profits, and costs. Irrelevant information should not be considered because it increases the amount of information and creates an unnecessary load on the managers.
2. In addition, the managers should use the contribution margin approach to separate the variable and fixed costs because both the costs behave differently and, therefore, should be analyzed accordingly.