SHORT-RUN DECISION MAKING: RELEVANT
COSTING AND INVENTORY MANAGEMENT
A tactical decision is short run in nature; it
involves choosing among alternatives with
an immediate or limited end in view. A stra-
tegic decision involves selecting strategies
that yield a long-term competitive advant-
Depreciation is an allocation of a sunk cost.
This cost is a past cost and will never differ
The salary of the supervisor of an assembly
line with excess capacity is an example of
an irrelevant future cost for an accept or re-
Past costs can be used to help predict future
Yes. Suppose, for example, that sufficient
materials are on hand for producing a part
for two years. After two years, the part will
be replaced by a newly engineered part. If
there is no alternative use for the materials,
then the cost of the materials is a sunk cost
and not relevant in a make-or-buy decision.
Complementary effects may make it more
expensive to drop a product.
A manager can identify alternatives by using
his or her own knowledge and experience
and by obtaining input from others who are
familiar with the problem.
No. Joint costs are irrelevant. They occur re-
gardless of whether the product is sold at
the split-off point or processed further.
Yes. The incremental revenue is $1,400,
and the incremental cost is only $1,000, cre-
ating a net benefit of $400.
No. If a scarce resource is used in producing
the two products, then the product providing
the greatest contribution per unit of scarce
resource should be selected. For more than
one scarce resource, linear programming
may be used to select the optimal mix.
If a firm is operating below capacity, then a
price that is above variable costs will in-
No, the purchase price is not part of the fun-
damental EOQ formula. However, the poten-
tial for quantity discounts may be considered
by management in deciding whether or not
to order the EOQ amount. For example, the
company may order more than the EOQ
amount if the quantity discount is larger than
the additional carrying cost.
Ordering costs are the costs of placing and
receiving an order. Examples include clerical
costs, documents, insurance, and unloading.
Carrying costs are the costs of carrying in-
ventory. Examples include insurance, taxes,
handling costs, and the opportunity cost of
capital tied up in inventory.
Stockout costs are the costs of insufficient
inventory (e.g., lost sales and interrupted
Reasons for carrying inventory include the
following: (a) to balance setup and carrying
costs, (b) to satisfy customer demand, (c) to
avoid shutting down manufacturing facilities,
(d) to take advantage of discounts, and (e)
to hedge against future price increases.