Assessment 2 – Step 6

Chapter 8: We Have Got to Make Some Decisions

I am fascinated by how managers make decisions. It all seems quite straightforward but once it is broken down it is very thorough. I never realised that this is all involved in the accounting processes of a firm, I always assumed accounting was numbers and numbers only. After reading through all the chapters I am now finding myself looking at accounting differently. When enrolling in this subject I was nervous, I assumed this was going to be the hard one - the one filled with maths and equations… I did not expect to be learning what I have learnt and I am enjoying the surprise!

When I think of decision making in a business, I did assume that all costs involved in a business are relevant to a decision. Everything within a business seems to be tied together somewhere, but I was wrong! Sunk costs are irrelevant to decisions as they have already been paid for or they are a cost that a firm cannot avoid paying in the future. Now I have read the reasons why, I do understand how sunk costs could be irrelevant to a decision. Differential or incremental costs and benefits are important when making a decision as they will change depending on what decision is made.

I completed and passed my Economics subject late last year, so reading about the opportunity costs and replacement costs was great. I was already familiar with this concept and it was a great refresh on what I have previously already learnt.

Figures 8-1, 8-2 & 8-3 were great at helping me understand the concepts and equations for the contribution margin used to figure out why Robinhood was losing money and how to maximise their returns. The tables me to absorb the information and see it in action.

→ Contribution margin (CM) = Sales revenue (S) – Variable costs (VC)

Time value of money is an interesting concept, I was actually surprised that the business world uses this. I understand how it would work day to day for me, but not for businesses being on a larger scale. I didn’t think the concept would be relevant. After reading through the texts, it makes sense especially knowing the money in the future is never certain.

I am thrilled with what I have learnt in this subject, especially that it is relevant to my life. This has handed me the tools to better myself and my business career, thank you.