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CMA Final · Strategic Cost Management

Decisions Involving Alternative Choices: CMA Final SCM Guide

Decisions involving alternative choices compare two or more courses of action using only relevant costs and revenues: future, cash-based and different between the options. You list each option's incremental figures, compare them, add qualitative factors and give a clear recommendation. Sunk and unchanged costs are ignored.

What this chapter covers

This chapter in Paper 16, Strategic Cost Management, teaches you to choose between options using cost information. The same method runs through every topic: find the relevant costs (future, avoidable, differing between options), compare them, and recommend. Make or buy, special orders, shutdown, product mix, sell or process further and pricing are all applications of that one idea.

The chapter builds on marginal costing, contribution and cost behaviour from earlier studies. It also links forward to other parts of the paper, such as pricing, cost control and performance measurement, where the same incremental thinking is used. If your cost behaviour is weak, fix that first, because most errors here begin with wrongly classifying a cost as fixed, variable or avoidable.

In the exam, these questions are written as short business situations. You are given a mix of figures, some useful and some traps, and asked what the company should do. Marks go for correct relevant figures, a clean comparison and a stated conclusion with sensible non-financial points.

Decision questions are among the most practical and predictable in Paper 16, and they suit both the objective section and the 14-mark descriptive questions. The workings are short, the logic repeats across topics, and a student who learns the method can score well even on unfamiliar scenarios. Marks are lost mainly through careless classification of costs and missing recommendations, both of which you can fix with practice. Because a single case can be tested in MCQs and as a full question, one solid preparation pays twice.

Decisions involving Alternative Choices: topics in the order to study them

  1. 1Relevant Costing and Decision-Making FrameworkIt gives the rules on relevant, sunk, opportunity and committed costs that every later topic depends on.
  2. 2Make or Buy DecisionsIt is the simplest application of relevant costs: compare avoidable cost of making with the buying price.
  3. 3Accept or Reject Special Order DecisionsIt extends incremental analysis to revenue and spare capacity, and introduces the opportunity cost of lost sales.
  4. 4Shut Down or Continue DecisionsIt tests avoidable versus unavoidable fixed costs, a sharper use of the same classification.
  5. 5Product Mix with Limiting FactorsIt adds a scarce resource, so you rank by contribution per unit of that resource instead of per unit of product.
  6. 6Sell or Process Further DecisionsIt needs the joint cost idea: joint costs are sunk at the split-off point, so only further costs and extra revenue matter.
  7. 7Pricing, Replacement and Other Alternative Choice DecisionsIt mixes the earlier methods in wider cases, so it is best studied last as a revision of the whole chapter.

How to prepare Decisions involving Alternative Choices

Treat this chapter as one method applied seven ways. Learn the method first, then drill the variations.

  1. Write down the test for relevance: future, cash, and different between options. Use it on every figure in every question.
  2. Practise sorting costs from a sample case into relevant and irrelevant, and note why each is dropped, before doing any calculation.
  3. Solve each topic in a fixed layout: options side by side, incremental figures, difference, decision. Keep the layout the same every time.
  4. For limiting factor questions, rank products by contribution per unit of the scarce resource, then allocate resource in that order, checking any demand limits.
  5. Always finish with a one or two line recommendation and two or three qualitative factors, such as supplier reliability, quality, labour impact or long-term customers.
  6. Mix questions from different topics in one sitting so you learn to spot which decision type is being asked.
  7. Time yourself on 14-mark questions and also practise the MCQ versions, which test one trap each.

Common mistakes in Decisions involving Alternative Choices

  • Including sunk or allocated fixed costs in the comparison

    Fix: Test each figure: will it change because of this decision? If not, leave it out and say why.

  • Ignoring opportunity cost of capacity or materials

    Fix: Ask what the resource would earn in its next best use, and include that as a relevant cost.

  • Ranking products by contribution per unit when a limiting factor exists

    Fix: Identify the scarce resource first and rank by contribution per unit of that resource.

  • Treating all fixed costs as unavoidable in shutdown or make-or-buy cases

    Fix: Read the data for fixed costs that can be saved, such as supervisor salaries or rent that ends, and treat those as relevant.

  • Including joint costs in a sell or process further decision

    Fix: Treat joint costs as sunk at split-off and compare only further processing cost with incremental revenue.

  • Stopping at the numbers without a recommendation

    Fix: Write a clear decision line and brief qualitative points every time, and reserve a minute for it.

Last-day revision: Decisions involving Alternative Choices

  • Relevant cost is a future cash flow that differs between alternatives.
  • Sunk costs and committed costs are never relevant.
  • Opportunity cost is the benefit given up by choosing an option, and it is relevant.
  • Make or buy: compare avoidable cost of making with the purchase price, then check for use of freed capacity.
  • Special order: accept if incremental revenue exceeds incremental cost, after allowing for any lost sales or displaced contribution.
  • Shutdown: compare contribution lost with avoidable fixed costs saved.
  • Only avoidable fixed costs affect a shutdown or make-or-buy decision.
  • Limiting factor: rank by contribution per unit of the scarce resource.
  • With more than one constraint, use a linear programming style approach rather than simple ranking.
  • Joint costs are irrelevant to sell or process further; compare extra revenue with extra processing cost.
  • Replacement decisions use relevant cash flows; book value of the old asset is sunk, but its sale value is relevant.
  • Always end with a recommendation and qualitative factors.

Decisions involving Alternative Choices practice questions

Decisions involving Alternative Choices in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Decisions involving Alternative Choices: frequently asked questions

What is a relevant cost in CMA Final SCM?

A relevant cost is a future cash cost that differs between the alternatives being compared. Sunk costs, committed costs and costs that stay the same under every option are ignored. Opportunity costs are included.

In what order should I study this chapter?

Start with the relevant costing framework, then make or buy, special orders, shutdown, product mix with limiting factors, sell or process further, and finally pricing and replacement. Each topic uses ideas from the one before it.

Are these topics asked in the objective section or in written questions?

Both are possible. Paper 16 opens with a compulsory section of 15 MCQs, and decision concepts can appear there as short traps. They can also form a full 14-mark descriptive question that needs workings and a recommendation.

Do I need to give a recommendation as well as calculations?

Yes. These are decision questions, so state clearly what the company should do. Add a few qualitative factors, such as quality, supplier risk or customer relationships, to show judgement.