Accounting Business Reporting for Decision Making

504 Accounting: Business Reporting for Decision Making

The following sections of this chapter deal with the steps in the decision-making process. Thus, the

next four major sections discuss the decision-support tools available, their data requirements and their

decision rules. The final section examines some of the practical issues in applying these decision-support

tools. Data and information for an investment decision are given in illustrative example 12.1.

ILLUSTRATIVE EXAMPLE 12.1

The material for a decision

Coconut Plantations Pty Ltd manufactures sustainable coconut-based products. Jo Geter, the man-

ager, has been successful in securing long-term contracts to supply a variety of retailers in Australia

with quantities of soaps, candles and detergents packaged under the Habitat Eco Friendly label. To

ensure the adequate supply of coconut oil, the major raw material for each product, Jo has worked out

a remuneration deal for potential suppliers. Each manufacturer is offered a four-year contract to supply

certified organic coconut oil. The oil is purchased at $200 per 100 litres as a standard price. Coconut oil

that fails the certification process will be accepted at a 20 per cent discount.

Under these arrangements, manufacturers can expect to earn the following net cash returns. The net

cash inflows in table 12.1 are net of raw materials, other ingredients, processing costs, manufacturing

overhead and delivery. The manufacturer’s own labour costs are excluded.

TA BLE  12 .1 Expected net cash inflows ($000)

Year Expected net cash flows ($000)

1 30

2 60

3 50

4 40

Specialised equipment necessary to manufacture certified organic coconut oil is estimated to cost

$120 000. The equipment can be sold for $60 000 on the secondhand market after four years of usage.

Each supplying manufacturer will use the straight-line method of depreciation. With this information, we

now have enough data to make an investment decision. Throughout the chapter, we will use this data

to arrive at an investment decision for the suppliers of coconut oil using the various techniques as they

are explained.

VALUE TO BUSINESS

•   Investment decisions are made by managers in all sorts of entities. Some of the most common

features of investments are that:

• they often involve large amounts of resources in relation to entity asset bases or turnover


• they involve risk and uncertainty


• they often span long periods of time


• normally, a relatively large cash outlay is required initially, and returns are received over a long
  period into the future


• it is often difficult to reverse investment decisions without the loss of substantial funds, so
  reasoned initial judgements are critical.