Short-run Tactical Decisions Summary

In addition to providing information for short-run profit planning purposes, the accountant also often has to provide information for a number of short-run tactical decisions such as dropping a product line or choosing between selling or further processing a semi-manufactured product. As in other areas of accounting, cost information plays an important role in short-run tactical decisions. The costs which are relevant for such decisions are future differential costs.

As in the case of c-v-p, short-run tactical decisions are aimed at making the best use of existing facilities. Particular use is made of the contribution margin, which is the excess of the expected revenue resulting from a decision over the expected relevant costs of that decision which is available as a contribution towards fixed costs and profits.

Although opportunity costs are not recorded in the accounting process, there are a number of decision problems where opportunity costs are the only relevant costs. Opportunity costs may be defined as the value of the next best opportunity foregone, or of the net cash inflow lost as a result of preferring one alternative rather than the next best one. Opportunity costs are useful and relevant costs for the following decisions:

(a) dropping a product line;

(b) selling or further processing a semi-manufactured product;

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(c) operating or lease assets;

(d) making or buying a product.

Limits placed on resources have to be recognized in decision making. Product-mix decisions illustrate the nature of this problem and the manner in which the best use of limited resources may be made. In this connection, linear programming affords a useful technique for maximizing profits or minimizing costs in the face of constraints on resources.


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Read on: Linear Programming and Decision Making

Linear programming and decision making

Linear programming is a mathematical technique which seeks to make the best use of a firm's limited resources to meet chosen objectives, which in accounting terms may take the form of the maximization of profits or the minimization of costs. In those situations, for example, where a manufacturer has a limited plant capacity, the level and cost of output will be determined by such capacity.

The approach to the solution of a problem under linear programming consists, firstly, of formulating the problem in simple algebraic terms. There are two... see: Linear Programming and Decision Making