ACC10007 Lecture Notes - Lecture 8: Opportunity Cost, Sunk Costs

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28 Oct 2018

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Relevant costing for decision making: we use our knowledge of cost behaviour to help us in a wide range of tactical or short term decision making. For decision making purposes, it makes sense to consider the relevant revenues and costs only, and exclude those that are not relevant to the decision. Tactical decision making involves choosing amongst alternatives with an immediate or limited end in view. The (cid:373)a(cid:374)age(cid:373)e(cid:374)t a(cid:272)(cid:272)ou(cid:374)ta(cid:374)t"s role i(cid:374) the de(cid:272)isio(cid:374)-making process is to provide relevant information to the decision makers. Tactical decision making: does not usually require significant increases or decreases in capacity-related resources. Tends to be short run in nature; though sr decisions can have lt implications. Tends to be able to be changed or reversed easily. Should (cid:271)e (cid:272)o(cid:374)siste(cid:374)t (cid:449)ith fir(cid:373)"s o(cid:448)erall lt o(cid:271)je(cid:272)ti(cid:448)es. Relevant costs and benefits are future costs / benefits that differ across alternative courses of action. May require a balance between timeliness & accuracy.

Related Questions

Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

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ACC10007 Lecture Notes - Lecture 8: Opportunity Cost, Sunk Costs

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