1. Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University

2. TACTICAL DECISION MAKING 11 11-2 Copyright © 2013 Nelson Education Ltd.

3. 11-3 1 Tactical Decision Making Copyright © 2013 Nelson Education Ltd. 1. Recognize and define the problem 2. Identify alternatives as possible solutions to the problem 3. Eliminate any unfeasible alternatives 4. Identify the relevant costs and benefits associated with each feasible alternative 5. Compare the relevant costs and benefits for each alternative including qualitative factors 6. Select the alternative with the greatest overall benefit

4. 11-4 1 Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Decision Model A set of procedures that, if allowed, will lead to a decision

5. 11-5 1 Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Tactical Cost Analysis The use of relevant cost data to identify the alternative that provides the greatest benefit to the organization Includes identifying relevant costs, measuring them, and comparing them to various options

6. 11-6 1 Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Decision Model: Tactical Decision- Making Process

7. 11-7 2 Relevant Costs and Reserves Copyright © 2013 Nelson Education Ltd. Relevant Costs (revenues) Future costs (revenues) that differ among alternative options Future costs can be relevant

8. 11-8 2 Relevant Costs and Reserves Copyright © 2013 Nelson Education Ltd. Irrelevant Cost If a cost is the same among different alternatives, it has no effect on the decision choosing one of them Past costs (sunk costs) are irrelevant Example: When you are trying to decide whether or not to sell the business, the cost of a building bought five years ago is a sunk — irrelevant — cost.

9. 11-9 3 The Activity Resource Usage Model Copyright © 2013 Nelson Education Ltd. Flexible Resources Can be easily purchased in the amount needed and at the time of use (e.g., electricity) If the demand for an activity changes across alternatives, then resource spending will change and the cost of the activity is relevant to the decision. If the demand is constant, the cost of activity is not relevant. Committed Resources Are purchased before they are used (e.g., salaried employees)

10. 11-10 3 The Activity Resource Usage Model Copyright © 2013 Nelson Education Ltd. Supply > Demand = Unused capacity If a change in demand for the activity requires a change in resource supply, then the activity cost will be relevant to the decision in two ways: If demand for the resource exceeds the supply (increases resource spending) If demand for the resource drops permanently, supply exceeds demand enough so that activity capacity can be reduced (decreases resource spending)

11. 11-11 4 Illustrative Examples of Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Make-or-Buy Decision A decision whether to make or buy components or services used in making a product or providing a service Outsourcing refers to the move of a business function to another company, either inside or outside the country. See Cornerstone 11-1

12. 11-12 4 Illustrative Examples of Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Keep-or-Drop Decisions Determine whether a segment should be kept or dropped Segmented income statements, using unit-based fixed or variable costs, improve the ability to make keep-or-drop decisions Revenues and costs that are directly attributable to a segment must be identified If a segment is dropped, then only the traceable revenues and costs should vanish See Cornerstone 11-2

13. 11-13 4 Illustrative Examples of Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Special-Order Decisions Focus on whether a specially priced order should be accepted or rejected Acceptance or rejection of special orders has a short-term focus Care should be taken so that acceptance of special orders does not jeopardize normal distribution channels or adversely affect other strategic elements See Cornerstone 11-3

14. 11-14 4 Illustrative Examples of Tactical Decision Making Copyright © 2013 Nelson Education Ltd. Decisions to Sell or Process Further Joint products have common processes and costs of production up to a split-off point The point of separation is called the split-off point All joint production costs are irrelevant to the sell or process further decision. By the time the split-off point is reached, all joint costs are sunk and irrelevant. See Cornerstone 11-4

15. 11-15 End of Chapter 11