Activity Resource Usage Model and Tactical Decision Making

1. Activity Resource UsageModel and Tactical DecisionMaking Chapter 17

2. Chapter 17 Objectives • Describe the tactical decision-making model • Define the concept of relevant costs and revenues • Explain how the activity resource usage model is used in assessing relevancy • Apply the tactical decision-making concepts in a variety of business situations

3. TACTICAL DECISION MAKING Choosing among alternatives with an immediate or limited end in view LO-1

4. 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 LO-1

5. 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

6. Exhibit 17.1—Decision Model: Tactical Decision-Making Process LO-1

7. 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

8. RELEVANCY, COST BEHAVIOR, AND THEACTIVITY 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 LO-3

9. Exhibit 17.2: Resource Demand and Supply LO-4

10. ILLUSTRATIVE EXAMPLES OF TACTICALDECISION 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 LO-4

11. ILLUSTRATIVE EXAMPLES OF TACTICALDECISION 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

12. ILLUSTRATIVE EXAMPLES OF TACTICALDECISION MAKING Special-Order Decisions Focuses on whether a specially priced order should be accepted or rejected LO-4

13. ILLUSTRATIVE EXAMPLES OF TACTICALDECISION 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

14. End of Chapter 17