Cornerstones of cost management 3rd edition hansen mowen chapter 17

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

CHAPTER 17

ACTIVITY RESOURCE USAGE MODEL AND TACTICAL DECISION

MAKING

CHAPTER 17 OBJECTIVES

1 Describe the tactical decision-making

model

2 Define the concept of relevant costs and

revenues

3 Explain how the activity resource usage

model is used in assessing relevancy

4 Apply the tactical decision-making

concepts in a variety of business

situations

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

TACTICAL DECISION MAKING

• Choosing among alternatives with an

immediate or limited end in view

LO-1

TACTICAL DECISION MAKING

The Tactical Decision-Making Process

• Recognize and define the problem

• Identify alternatives as possible solutions to the problem,

and eliminate any unfeasible alternatives

• Identify the costs and benefits associated with each

feasible alternative

• Eliminate the costs and benefits that are not relevant to the

decision

• Compare the relevant costs and benefits for each

alternative

• Assess qualitative factors

• Select the alternative with the greatest overall benefit

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

TACTICAL DECISION MAKING

Summary of Decision-Making Process

• The six steps define a simple decision model

• Decision model is a set of procedures that, if

followed, will lead to a decision

• Steps 3 and 4 define tactical cost analysis

• Tactical cost analysis is the use of relevant cost data

to identify the alternative that provides the greatest

benefit to the organization

LO-1

EXHIBIT 17.1—DECISION MODEL: TACTICAL

DECISION-MAKING PROCESS

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

RELEVANT COSTS AND REVENUES

• Relevant costs (revenues) are future costs

(revenues) that differ across alternatives

• If a future cost is the same for more than

one alternative, it has no effect on the

decision

• Such a cost is an irrelevant cost

LO-2

RELEVANCY, COST BEHAVIOR, AND THE

ACTIVITY RESOURCE USAGE MODEL

• The activity resource usage model focuses

on the use of resources and has two

categories

• Flexible resources: purchased in the amount

needed and at the time of use (like electricity)

• Committed resources: acquired in advance of

usage through implicit contracting (like salaried

employees)

• Usually acquired in lumpy amounts

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

EXHIBIT 17.2: RESOURCE DEMAND

AND SUPPLY

LO-4

ILLUSTRATIVE EXAMPLES OF TACTICAL

DECISION MAKING

Make or Buy Decisions

• A decision whether to make or to 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 United States

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

ILLUSTRATIVE EXAMPLES OF TACTICAL

DECISION MAKING

Keep-or-Drop Decisions

• Involves determining whether a segment or line of

business should be kept or dropped

• Uses relevant cost analysis

LO-4

ILLUSTRATIVE EXAMPLES OF TACTICAL

DECISION MAKING

Special-Order Decisions

• Focuses on whether a specially priced order

should be accepted or rejected

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

ILLUSTRATIVE EXAMPLES OF TACTICAL

DECISION MAKING

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

• Key point in this decision is that all the joint

production costs are irrelevant to the sell or

process further decision

LO-4

END OF CHAPTER 17