Decision Making with Relevant Costs and a Strategic Emphasis

1
Decision Making with Relevant Costs and a
Strategic Emphasis
Chapter Nine
2
The Decision-Making Process
First Determine theStrategic Issues
Third Relevant Cost Analysis and Strategic Cost
Analysis
Second Specify the Criteriaand Identify
theAlternative Actions
Identify and CollectRelevant Information
Predict Future Values ofRelevant Costs Revenues
Fourth Select and Implement aCourse of Action
Consider Strategic Issues
Fifth EvaluatePerformance
3
Relevant Cost Analysis

• A relevant cost is a future cost that differs
  between the decision alternatives
• Both characteristics must be present for a cost
  to be relevant
• Relevant costs can be variable or fixed, but
  variable costs are generally relevant while fixed
  costs are not
• Relevant cost analysis and total cost analysis
  produce the same results
• A sunk cost is a cost that has been incurred in
  the past or committed for the future

4
Relevant Cost Analysis Additional Considerations

• Batch-level cost drivers should be considered in
  relevant cost analysis
• For example, if setup on one machine takes longer
  and requires more skilled labor than the other
  machine, these factors should be included in the
  analysis
• Opportunity costs, the benefit lost when one
  chosen option precludes the benefits from an
  alternative option, should also be considered in
  the analysis of alternative options
• For example, addition of a new product could
  cause reduction, delay, or lost sales in other
  product areas

5
Relevant Cost Analysis Additional Considerations
(continued)

• Depreciation is not included in relevant cost
  analysis except when considering tax implications
• Time-value of money is relevant when deciding
  among alternatives with cash flows over two or
  more years
• Importance of qualitative factors
• Differences in quality
• Functionality
• Timeliness of delivery
• Reliability in shipping
• After-sale service level

6
Strategic Cost Analysis

• Strategic information keeps the decision makers
  attention focused on the firms crucial strategic
  goal
• By identifying only relevant costs, the decision
  maker might fail to link the decision to the
  firms strategy
• For example, while it may be advantageous to
  outsource production of a part based on cost
  figures, this decision might be a poor strategic
  move if the firms competitive position depends
  on product reliability that can be maintained
  only by manufacturing that part internally

7
Relevant Cost Analysis vs. Strategic Cost
Analysis
8
Relevant and Strategic Cost Analysis in Decision
Making

• This decision framework can be used to address
  common management decisions such as
• The special-order decision
• The make-lease-or-buy decision
• The decision to sell before or after additional
  processing
• The short-term product-mix decision
• Profitability analysis (e.g., short-term
  product-mix decisions)