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Chapter 5

Chapter 5. Short-term Decision Making. Objectives. After studying this t opic you will be able to : Understand costs that are relevant to the decision making process in different circumstances;

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Chapter 5

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  1. Chapter 5 Short-term Decision Making

  2. Objectives After studying this topic you will be able to: Understand costs that are relevant to the decision making process in different circumstances; Demonstrate working knowledge of typical short term decisions managers have to make and how financial data can support these decisions; Recognise the issues of managing scarce recourses in decision making; and Appreciate the implications of outsourcing in a business context.

  3. Relevant costs in decision making In short term decision making costs can be classified as to whether they are: Relevant or Irrelevant

  4. Events Example A venue has been hired for a commercial event to take place in 2 weeks’ time, unfortunately ticket sales have been very slow and it looks as though the event will be run at a loss. The manager of the events company needs to make the decision ‘should the event be cancelled or not?’ from a financial perspective he would need to look at the ‘relevant’ costs to see which costs would be ‘relevant’ to his decision. What would these be?

  5. Solution (1)

  6. Solution (2) For this specific decision the balance is: Decision A – the event goes ahead – if it does there is some income, but all the ‘relevant’ costs will be incurred. Decision B – the event is cancelled – in this situation the ‘relevant’ costs would not be incurred, but refunds would need to be issued (another cost) and there would be no income.

  7. Opportunity costs The opportunity cost is the value of the ‘opportunity’ lost for the next best alternative in making a specific decision.

  8. Difference between short term and long term decisions?

  9. Types of short term decisions Make or buy Cease operations Offer special packages Acceptance of one off contracts

  10. Example: make or buy decision

  11. Solution

  12. Example: decision to cease tour destination

  13. Close the Indian operation

  14. Original data amended to only show the relevant costs for each location

  15. Additional Considerations The long term perspective Scarce resources Uncertainty Outsourcing

  16. Summary Relevant costs are those that are relevant to a specific decision being made. An opportunity cost is concerned with the ‘missed opportunity’ when deciding between mutually exclusive options. There are various types of short term decisions – each may have a slightly different focus or role within the organisation. Short term decisions can have long term implications for an organisation. Scarce resource can lead managers to focus on how to use them to maximise the return for the organisation.

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