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ACC 200 Lecture Notes - Lecture 8: Longrun, Income Statement, Sunk Costs

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School
NCSU
Department
Accounting
Course
ACC 200
Professor
Christopher Tague Mc Kittrick

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Document Summary

Short-run decision making consists of choosing among alternatives with an immediate or limited end in view. Also referred to as tactical decisions because they involve choosing between alternatives with an immediate or limited time frame in mind. Example: accepting a special order for less than the normal selling price to utilize idle capacity and to increase this year"s profits. Some decisions tend to be short run in nature. A decision model, a specific set of procedures that produces a decision, can be used to structure the decision maker"s thinking and to organize the information to make a good decision. The following is an outline of one decision-making model: Identify alternatives as possible solutions to the problem. Identify the costs and benefits associated with each feasible alternative. Classify costs and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration. Estimate the relevant costs and benefits for each feasible alternative.

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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.