CHAPTER 13:
SHORT-RUN DECISION MAKING:
RELEVANT COSTING
Cornerstones of Managerial
Accounting, 6e
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Short-Run Decision Making
 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.
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The Decision-Making Model
 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 decisionmaking model:
 Step 1. Recognize and define the problem.
 Step 2. Identify alternatives as possible solutions to the
problem. Eliminate alternatives that clearly are not
feasible.
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The Decision-Making Model (cont.)
 Step 3. Identify the costs and benefits associated with
each feasible alternative. Classify costs and benefits as
relevant or irrelevant, and eliminate irrelevant ones from
consideration.
 Step 4. Estimate the relevant costs and benefits for
each feasible alternative.
 Step 5. Assess qualitative factors.
 Step 6. Make the decision by selecting the alternative
with the greatest overall net benefit.
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Relevant Costs Defined
 The decision-making approach emphasizes the
importance of identifying and using relevant
costs.
 Relevant costs possess two characteristics:
 they are future costs AND
 they differ across alternatives.
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Opportunity Costs
 Opportunity cost is the benefit sacrificed or
foregone when one alternative is chosen over
another.
 An opportunity cost is relevant because it is both
a future cost and one that differs across
alternatives.
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Sunk Costs
 A sunk cost is a cost that cannot be affected by
any future action.
 Although managers should ignore sunk costs for
relevant decisions, it unfortunately is human
nature to allow sunk costs to affect these
decisions.
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Cost Behavior and
Relevant Costs
 Most short-run decisions require extensive
consideration of cost behavior.
 The key point is that changes in supply and
demand for resources must be considered when
assessing relevance.
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Some Common
Relevant Cost Applications
 Relevant costing is of value in solving many
different types of problems. Traditionally, these
applications include decisions:
 to make or buy a component.
 to keep or drop a segment or product line.
 to accept a special order at less than the usual price.
 to further process joint products or sell them at the split-
off point.
 Though by no means an exhaustive list, many of
the same decision-making principles apply to a
variety of problems.
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Make-or-Buy Decisions
 Managers face the decision of whether to make a
particular product (or provide a service) or to
purchase it from an outside supplier.
 Make-or-buy decisions are those decisions
involving a choice between internal and external
production.
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Structuring a Make-or-Buy Problem
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Special Order Decisions
 Firms have the opportunity to consider special
orders from potential customers in markets not
ordinarily served.
 Special-order decisions focus on whether a specially
priced order should be accepted or rejected.
 These orders often can be attractive, especially when
the firm is operating below its maximum productive
capacity.
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Structuring a Special Order Problem
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Keep-or-Drop Decisions
 Segmented reports prepared on a variable-
costing basis provide valuable information for
these keep-or-drop decisions.
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Structuring a Keep-or-Drop
Product Line Problem
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Keep-or-Drop with
Complementary Effects
 Sometimes dropping one line would lower sales
of another line, as many customers buy both lines
at the same time.
 This information can affect the keep-or-drop
decision.
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Structuring a Keep-or-Drop Product
Line Problem with Complementary Effects
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Further Processing of
Joint Products
 Joint products have common processes and
costs of production up to a split-off point. At that
point, they become distinguishable as separately
identifiable products.
 The point of separation is called the split-off
point.
 Sometimes it is more profitable to process a joint
product further, beyond the split-off point, prior to
selling it (sell or-process-further decision).
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Structuring the
Sell-or-Process Further Decision
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