1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. MANAGEMENT ACCOUNTING 8 th EDITION BY HANSEN & MOWEN 12 TACTICAL DECISION MAKING STUDENT EDITION

2. 2 1.Describe the tactical decision-making model. 2.Explain how the activity resource usage model is used in assessing relevancy. 3.Apply tactical decision-making concepts in a variety of business situations. LEARNING OBJECTIVES Continued

3. 3 4.Choose the optimal product mix when faced with one constrained resource. 5.Explain the impact of cost on pricing decisions. 6.Use linear programming to find the optimal solution to a problem of multiple constrained resources. (Appendix) LEARNING OBJECTIVES

4. 4 TACTICAL DECISION MAKING: Definition Consists of choosing among alternatives with an immediate or limited end in view. LO 1

5. 5 STRATEGIC DECISION MAKING: Definition Is selecting among alternative strategies so that long term competitive advantage is established. LO 1

6. 6 TACTICAL MODEL A general approach to tactical decision making includes: 1.Recognize, define the problem 2.Identify alternatives, eliminating those that are unfeasible 3.Identify costs & benefits 4.Total relevant costs, benefits of each alternative 5.Assess qualitative factors 6.Select alternative with greatest overall benefit LO 1 Assess qualitative factors

7. 7 TIDWELL PRODUCTS: Background Tidwell Products Inc. is facing expanded production that is straining the capacity in facilities with 5 years remaining on their lease. Two feasible alternatives under consideration are a) to rent an additional building for warehousing and b) outsource production. The CFO will prepare a report of detailed costs for these alternatives. LO 1

8. 8 APPLYING TACTICAL MODEL LO 1 Step 1: Define the problemIncrease capacity for warehousing & production Step 2: Identify alternatives1.Build new facility 2.Lease larger facility; sublease current facility 3.Lease additional facility 4.Lease warehouse space 5.Buy shafts & bushings; free up space Continued

9. 9 APPLYING TACTICAL MODEL LO 1 Step 3: Identify costs, benefitsAlt 4: + Benefits Alt 5: + Benefits Step 4: Total relevant costs & benefits Alt 4: Relevant + Benefits Alt 5: Relevant + Benefits Differential cost Step 5: Assess qualitative factors1.Quality of external supplier 2.Reliability of external supplier 3.Price stability 4.Labor relations & community image Step 6: Make decisionContinue producing & lease warehouse

10. 10 RELEVANT COSTS: Definition Are future costs that differ across alternatives. LO 1 differ across alternatives.

11. 11 RELEVANT VS. IRRELEVANT COSTS LO 1 Cost to Make Cost Not to Make Differential Cost Direct labor$ 150,000---$ 150,000 Depreciation125,000$ 125,000--- Allocated lease12,000 --- $ 287,000$ 137,000$150,000 Direct labor is the relevant cost because it differs between alternatives.

12. 12 MANUFACTURING FIRM: Background A manufacturing firm employs five (5) engineers with a capacity of 10,000 engineering hours (2,000 hours each) at a cost of $250,000 ($25 per hour). The firm expects to use only 9,000 engineering hours during the current year, producing unused capacity. LO 2

13. 13 Should the firm consider accepting a special order that uses 500 engineering hours? Yes. The firm should consider accepting the special order, if it is otherwise profitable, because it will be completed with unused engineering capacity. LO 2

14. 14 SWASEY MANUFACTURING : Make-or-Buy Background Swasey Manufacturing, a printer manufacturer, will switch to a printer that does not use an electronic component it currently produces. Should Swasey produce 10,000 components for the older printer this year or should they purchase the component for $4.75? LO 3 Continued

15. 15 SWASEY MANUFACTURING: Relevant Information LO 3 MakeBuyCost to Make Equipment Rent$ 12,000---$ 12,000 Direct materials5,000---5,000 Direct labor20,000---20,000 Variable overhead8,000---8,000 Purchased cost---$ 47,500(47,500) Receiving Dept labor---8,500(8,500) Total$ 45,000$ 56,000$ (11,000) Alternatives Differential

16. 16 NORTON MATERIALS: Keep-or-Drop Background Norton Materials produces 3 products: blocks, bricks, and tile. The tile segment has a negative segment margin and does not contribute to common fixed expenses. Should Norton drop the tile division? LO 3 Continued

17. 17 NORTON MATERIALS: Keep-or-Drop LO 3 BlocksBricksTilesTotal Sales$ 500$ 800$ 150$ 1,450 Less Variable exp.250480140870 Contribution margin$ 250$ 320$ 10$ 580 Less direct fixed exp Advertising$ 10 $ 30 Salaries374035112 Depreciation534010103 Total$ 100$ 90$ 55$ 245 Segment margin$ 150$ 230$ (45)$ 335 Less Common fixed exp125 Operating income$ 210 Continued

18. 18 NORTON MATERIALS : Keep or Drop Analysis LO 3 Because Norton will lose sales in both blocks and brick if ceiling tiles are dropped and replacing ceiling tiles with floor tiles is less profitable, the firm is better off to keep the ceiling tile division.

19. 19 ICE CREAM: Special Order Background An ice cream company is operating at 80% of its 20 million gallon capacity. The company receives an offer to purchase 2 million gallons for $1.55 per gallon. This is below the wholesale price of $2.00. Should the company accept the offer? LO 3 Continued

20. 20 ICE CREAM : Special Order Analysis LO 3 Even though the special order price for 2 million gallons of ice cream is below the normal selling price of $2.00, it will be profitable because there is spare capacity and only relevant variable costs are considered in the decision.

21. 21 JOINT PRODUCTS: Definition Have common processes & cost of production up to a split-off point. LO 3 cost of production

22. 22 APPLETIME JOINT PRODUCTION LO 3 EXHIBIT 12-3

23. 23 APPLETIME : Process Further Analysis LO 3 Even though processing grade B apples further increases costs, there is more profit to be made from making pie filling than from selling grade B apples by the bag.

24. 24 CONSTRAINTS: Definition Are limitations a business faces such as limited resources or demand. LO 4

25. 25 PRICING: Legal Aspects  Predatory pricing  A means of setting price to eliminate competition  Dumping on international market  Price discrimination  Charging different prices to different customers  Price gouging  Using market power to set prices too high LO 5

26. 26 GRAPHING SOLUTION LO 6 EXHIBIT 12-4 Linear programming demonstrates the feasible production region & optimal solution for complex problems.

27. 27 THE END CHAPTER 12

28. 12-22 (hal 114)  Powell Dentistry Service memiliki laboratorium gigi untuk memproduksi gigi palsu yang terbuat dari perselen dan emas. Berikut biaya per unit untuk gigi palsu tersebut:  Overhead tetap diperinci sebagai berikut:  Gaji (pengawas) $26.000  Penyusutan $5.000  Sewa (Fasilitas laboratorium) $32.000 28 PerselenEmas BB$80$165 TKL27 Overhead variable88 Overhead tetap22 Total$137$222

29. Lanjutan  Overhead dibebankan atas dasar jam TKL, tarifnya dihitung dengan menggunakan 5.500 jam TKL.  Suatu laboratorium gigi lokal menawarkan untuk memasok Powell seluruh gigi palsu yang diperlukan dengan harga $130 untuk porselen dan $200 untuk emas. Harga tersebut berlaku untuk pembelian kedua jenis gigi, tidak berlaku bila Powell hanya mengambil satu jenis gigi palsu saja. Jika tawaran diterima, maka peralatan yang digunakan di laboratorium akan menjadi besi tua (peralatan Powell sudah tua dan tidak punya nilai pasar sehingga tidak dapat dijual) dan fasilitas laboratorium akan ditutup. Powell menggunakan 3.000 gigi porselen dan 800 gigi emas per tahun.  Diminta:  Haruskah membuat sendiri gigi palsu tersebut atau membeli dari eksternal? Bagaimana pengaruhnya terhadap keuangan perusahaan?  Faktor-faktor kualitatif apa yang harus dipertimbangkan Powell dalam membuat keputusan? 29