Making Decisions: Understanding Short Term Decision Making and Relevant Costs

Making Decisions: Understanding Short Term Decision Making and Relevant Costs

Learning Objective

At the end of the lesson, you will be able to understand short term decision making, relevant costs, opportunity costs, sunk costs, and their impact on decision making.

Introduce the learning objective to the students and provide an overview of what they will be able to achieve by the end of the lesson.

What do you already know about decision making and relevant costs?

Introduction

Short term decision making involves considering costs and benefits in the immediate future. Relevant costs are the costs that are directly affected by a decision.

Explain the concept of short term decision making and relevant costs to the students. Use examples to illustrate the concepts.

Types of Costs

There are different types of costs to consider in decision making: fixed costs, variable costs, opportunity costs, and sunk costs.

Discuss the different types of costs and explain their significance in decision making. Provide examples for each type of cost.

Fixed Costs

Fixed costs are costs that remain constant regardless of the level of production or sales. They do not change in the short term.

Explain the concept of fixed costs and how they impact decision making. Discuss examples of fixed costs in various scenarios.

Variable Costs

Variable costs are costs that change in direct proportion to the level of production or sales. They vary in the short term.

Discuss the concept of variable costs and their influence on decision making. Provide real-life examples to help students understand.

Opportunity Costs

Opportunity costs are the benefits foregone by choosing one alternative over another. They represent the value of the next best alternative.

Explain the concept of opportunity costs and how they play a role in decision making. Use relatable examples to enhance understanding.

Sunk Costs

Sunk costs are costs that have already been incurred and cannot be recovered. They should not be considered in decision making.

Discuss the notion of sunk costs and why they should be disregarded when making decisions. Provide examples to reinforce the concept.

Relevant Costs Analysis

Analyzing relevant costs involves identifying the costs that will change as a result of a decision and comparing them to the benefits.

Explain the process of relevant cost analysis and its importance in decision making. Provide a step-by-step breakdown of how to conduct such analysis.

Example: Make or Buy Decision

A make or buy decision involves determining whether to produce a product in-house or outsource it. Relevant costs include direct materials, direct labor, and variable manufacturing overhead.

Present a practical example of a make or buy decision and guide the students through the process of identifying the relevant costs associated with each option.

Decision Trees

Decision trees are visual tools used to evaluate different decision options and the potential outcomes associated with each option.

Introduce decision trees as a helpful tool for decision making. Explain how to construct and interpret decision trees using relevant cost information.

Exercise: Decision Making Scenarios

Present students with decision making scenarios and ask them to identify the relevant costs, opportunity costs, and sunk costs in each situation.

Engage students in an interactive exercise where they can apply their understanding of relevant costs, opportunity costs, and sunk costs to real-life scenarios.

Factors to Consider

When making short term decisions, consider factors such as demand, competition, pricing, quality, and capacity constraints.

Highlight the additional factors that should be taken into account when making short term decisions. Discuss their relevance in different contexts.

Wrap-up

Recap the key concepts learned in this lesson: short term decision making, relevant costs, opportunity costs, and sunk costs.

Summarize the main points covered in the lesson and emphasize their importance in effective decision making.

Summary Quiz

Test your understanding by answering the following questions: 1. What are relevant costs? 2. Define sunk costs. 3. Explain the concept of opportunity costs.

Administer a short quiz to assess the students' comprehension of the lesson material. Review the answers together as a class.

Real-Life Application

Identify a real-life scenario where short term decision making and consideration of relevant costs would be crucial. Discuss the potential outcomes of different decisions.

Engage students in a discussion about the practical application of the concepts learned in the lesson. Encourage critical thinking and analysis.

Additional Resources

Provide students with additional resources, such as articles, videos, or case studies, to further explore the topic of decision making and relevant costs.

Share external resources that students can explore to deepen their understanding of the subject matter. Encourage independent research and learning.

Q&A Session

Allow students to ask questions and seek clarification on any aspects of the lesson that may still be unclear to them.

Allocate time for a question and answer session to address any lingering doubts or confusion. Provide further explanations as needed.

Reflection

Ask students to reflect on what they have learned in this lesson and how they can apply it to their personal lives or future career paths.

Engage students in a reflective activity where they can connect the lesson content to their own experiences or aspirations. Encourage critical thinking.

Conclusion

Summarize the key takeaways from the lesson and express confidence in the students' ability to apply their knowledge of short term decision making and relevant costs.

Conclude the lesson by emphasizing the importance of understanding these concepts and their applicability in various decision-making scenarios.

Thank You!

Thank the students for their participation and encourage them to continue exploring the world of decision making and relevant costs.

Express gratitude to the students for their active engagement in the lesson. Encourage further exploration of the topic beyond the classroom.

Write down 3 things you learned in this lesson.

Have students enter three things they learned in this lesson. With this they can indicate their own learning efficiency of this lesson.

Write down 2 things you want to know more about.

Here, students enter two things they would like to know more about. This not only increases involvement, but also gives them more ownership.

Ask 1 question about something you haven't quite understood yet.

The students indicate here (in question form) with which part of the material they still have difficulty. For the teacher, this not only provides insight into the extent to which the students understand/master the material, but also a good starting point for the next lesson.