ACCT1101 Lecture 11: Short Term Planning

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.

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):

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)

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.

Match each of the six following terms with the phrase that mostclosely describes it. Each answer may be used only once. _____ 1.Direct costs _____ 2. Fixed costs _____ 3. Incremental costs _____4. Enterprise resource planning system _____ 5. Noncontrollablecosts _____ 6. Opportunity costs (A) Costs that increase ordecrease in total in response to increases or decreases in thelevel of business activity (B) Costs that are directly traceable toa product, activity, or department (C) Costs that a manager caninfluence (D) The difference in costs between decision alternatives(E) Costs incurred in the past that are not relevant to presentdecisions (F) Costs that cannot be influenced by a manager (G)Financial plans prepared by management accountants (H) Value of thebenefits foregone when one decision alternative is selected overanother (I) Costs that cannot be directly traced to a product,activity, or department or are not worth tracing (J) Costs that donot change in total with changes in the level of business activity(K) Systems that prepare a master production system and all of thesupport across the company