© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Chapter 5 Short-term Decision Making

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers 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.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Relevant costs in decision making In short term decision making costs can be classified as to whether they are: Relevant or Irrelevant

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers 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?

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Solution (1) Venue hirer costsIrrelevant – already paid in full, with a 100% charge if cancelled Printing ticketsIrrelevant – tickets already printed and cannot be reused Performing artists feesIrrelevant – already paid in full, with a 100% charge if cancelled Permanent event company staff salaries Irrelevant – they still have to be paid even if this event doesn’t run Casual staff employed for the event Relevant – if the event is cancelled these will not have to be paid Food & Beverage material costs Relevant – the food hasn’t been ordered as yet, if the event is cancelled there is no F & B costs Merchandising costsIrrelevant – programmes and t-shirts already printed Event publicity costs, flyers & posters Irrelevant – already printed and distributed

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers 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.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Opportunity costs The opportunity cost is the value of the ‘opportunity’ lost for the next best alternative in making a specific decision.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Difference between short term and long term decisions? Short term decisionsLong term decisions Operational, tactical in nature, meeting short term goals, or reacting to a crisis i.e. making the best of resources in the short term Strategic in nature, impact on corporate level objectives and goals i.e. making the best of resources in the long term Each decision involves relatively small amounts of monetary value Each decision can involve large sums of monetary value Relatively easy to change decision, withdraw from activity if the business environment changes Making wrong decisions can have a major financial impact on the firm

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Types of short term decisions  Make or buy  Cease operations  Offer special packages  Acceptance of one off contracts

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example: make or buy decision

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Solution Island Resorts HotelMAKEBUY Bread Rolls30,000 Purchase price $0.15 Variable material cost$1,800 Variable labour$1,200 Fixed costs avoided if not making$1,300 Total relevant costs$4,300$4,500

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example: decision to cease tour destination Peace Yoga RetreatsIndiaPortugalTurkeyTotalsNotes: £,000s Revenue An all-inclusive price covering plane, transfers, accommodation, full board, local representative and yoga teacher Variable transport costs Includes plane and transfers per person Variable hospitality costs Includes resort accommodation and meal costs Fixed resort cost Local representative & yoga teacher Fixed Head Office costs Fixed HO costs shared by 3 locations Total Costs Operating profit/loss by location

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Close the Indian operation Peace Yoga RetreatsPortugalTurkeyTotalsNotes: £,000s Revenue An all-inclusive price covering plane, transfers, accommodation, full board, local representative and yoga teacher Variable transport costs Includes plane and transfers per person Variable hospitality costs Includes resort accommodation and meal costs Fixed resort cost Local representative & yoga teacher Fixed Head Office costs Fixed HO costs shared by 2 locations Total Costs Operating profit by location Profit is much lower without operations in India

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Original data amended to only show the relevant costs for each location Peace Yoga RetreatsIndia Portuga l Turke yTotalsNotes: £,000s Revenue An all-inclusive price covering plane, transfers, accommodation, full board, local representative and yoga teacher Variable transport costs Includes plane and transfers per person Variable hospitality costs Includes resort accommodation and meal costs Fixed resort cost Local representative & yoga teacher Fixed Head Office costs 300 Not a location operating cost Total Costs Operating profit by location All locations make a positive input to company profits

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Additional Considerations  The long term perspective  Scarce resources  Uncertainty  Outsourcing

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers 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.