ACCT1101 Lecture 11: L11

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.

1. Which of the following costs is not relevant in aspecial-order decision?
A. Direct labor
B. Direct materials
C. Variable overhead
D. Fixed overhead

2. Costs that change across decision alternatives are
A. accounting costs.
B. activity-based costs.
C. incremental costs.
D. capital costs.

4. The potential benefit of one alternative that is lost bychoosing another is known as a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Differential cost
D. Opportunity cost

5. A cost that cannot be avoided or changed because it arisesfrom a past decision, and is irrelevant to future decisions, iscalled a(n):
A. Uncontrollable cost
B. Incremental cost
C. Opportunity cost
D. Sunk cost

6. An additional cost that is incurred only if a particularaction is taken is a(n):
A. Period cost
B. Pocket cost
C. Discount cost
D. Incremental cost

7. The payback period:
a. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net cash flow.
b. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net income.
c. Takes into consideration the profitability of an investment overits entire life, but ignores the timing of its future cashflows.
d. Takes into consideration both the profitability of an investmentover its entire life and the timing of its future cash flows.

Question 1 10 pts A segment of a business probably should bediscontinued if its contribution margin exceeds its controllablefixed costs and its common costs. it cannot produce a contributionmargin. its common costs exceed its contribution margin. it has anet loss. Flag this Question Question 2 10 pts Contribution marginis calculated by deducting fixed costs from revenue. deductingvariable costs and controllable fixed costs from revenue. deductingvariable costs and common costs from revenue. deducting variablecosts from revenue. Flag this Question Question 3 10 pts Which ofthe following is the first step in the decision-making process?Identify workable alternatives Define the problem Considerappropriate nonfinancial factors Evaluate the cost and revenue dataFlag this Question Question 4 10 pts Fixed manufacturing costs arewritten off as current expenses of the period in which theyoccurred when using direct costing. standard costing. absorptioncosting. differential costing. Flag this Question Question 5 10 ptsDirect costing differs from absorption costing in that underabsorption costing all fixed manufacturing overhead is expensed inthe current period. under direct costing all fixed overhead isexpensed in the current period. under absorption costing anincrease in finished goods inventory does not affect the amount offixed costs expensed. under direct costing a portion of the fixedmanufacturing overhead is included in the finished goods inventory.Flag this Question Question 6 10 pts Which is the final step in thedecision-making process? Evaluate the cost and revenue dataIdentify workable alternatives Consider appropriate nonfinancialfactors Make a decision Flag this Question Question 7 10 pts Whichof the following is NOT a consideration when determining whether tocontinue making a part or to buy that part? the opportunity costthe timing of the cash receipts and expenditures the impact onemployees the sunk cost Flag this Question Question 8 10 pts Coststhat are not directly traceable to a segment of a business arecalled sunk costs. common costs. fixed costs. incremental costs.Flag this Question Question 9 10 pts Which of the following shouldNOT be a consideration when deciding whether to make or buy a part?impact on continued supply of the part impact on quality of thepart under each set of circumstances impact on sales to existingcustomers impact on factory employee morale Flag this QuestionQuestion 10 10 pts In making a decision to replace a machine, whichof the following is not relevant? the variable costs of operatingthe old machine the training that workers will need in order to usethe new machine the book value of the old machine the variablecosts of operating the new machine