CHAPTER 17
ACTIVITY RESOURCE USAGE MODEL AND TACTICAL DECISION MAKING
Tactical decision making consists of choosing among alternatives with an immediate or limited end in
view. Tactical decisions can be short term or small scale in nature but must be made so that larger
strategic objectives are served. This chapter focuses on relevant information used in make-or-buy choices,
keep-or-drop decisions, special-order decisions, and sell-or-process-further decisions.
LEARNING OBJECTIVES
After studying Chapter 17, students should be able to:
1. Describe the tactical decision-making model.
2. Define the concept of relevant costs and revenues.
3. Explain how the activity resource usage model is used in assessing relevancy.
4. Apply the tactical decision-making concepts in a variety of business situations.
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each
topic):
1. Tactical Decision Making (LO 1)
2. Relevant Costs and Revenues (LO 2)
3. Relevancy, Cost Behavior, and the Activity Resource Usage Model (LO 3)
4. Illustrative Examples of Tactical Decision Making (LO 4)
I. TACTICAL DECISION MAKING
A. The Tactical Decision-Making Process
Fundamental to the decision-making process is the ability to determine whether a cost is relevant to the
decision. Tactical decision making consists of choosing among alternatives with an immediate or limited
end in view. It should be noted, however, that short-run decisions can often lead to long-term
consequences.
The six steps describing the tactical decision-making process are as follows:
1. Recognize and define the problem.
2. Identify alternatives as possible solutions to the problem, and eliminate any unfeasible
alternatives.
3. Identify the costs and benefits associated with each feasible alternative. Eliminate the costs and
benefits that are not relevant to the decision.
4. Compare the relevant costs and benefits for each alternative.
5. Assess qualitative factors.
6. Select the alternative with the greatest overall benefit.
Exhibit 17.1 (p. 880) summarizes and illustrates the steps of this process as they relate to the example
given. Steps three and four define tactical cost analysis. Tactical cost analysis is the use of relevant cost
data to identify the alternative that provides the greatest benefit to the organization.
B. Qualitative Factors
While cost and revenue information is important, other information, often qualitative in nature, is needed
to make an informed decision. Qualitative factors must first be identified. The decision maker should then
try to quantify these factors. True qualitative factors should be taken into consideration when selecting the
alternative with the greatest overall benefit.
Teaching hint: As step five in the decision-making process is covered, the limitations of the decision
model should be detailed. Students should understand that the quantitative analysis is but one of several
inputs required for the decision.
II. RELEVANT COSTS AND REVENUES
Relevant costs (revenues) are future amounts that differ across alternatives. Because all decisions relate to
the future, only future costs can be relevant to decisions. Sunk costs are past costs. For example, the
original cost of a building is a sunk cost when the building is being sold five years later.
Relevant costs and benefits are also useful in decision making in the international trade arena. Foreign
Trade Zones (FTZs) are areas that are physically located on U.S. soil but are considered to be outside U.S.
commerce. Companies in FTZs can engage in warehousing and/or manufacturing. If the items leave the
FTZ bound for non-U.S. destinations, then no tariff, a tax on imports levied by the federal government, is
due. If they leave the zone for U.S. destinations, then the tariff is due. Exercise 17.14 can be used to
demonstrate relevant costs relating to FTZs.
III. RELEVANCY, COST BEHAVIOR, AND THE ACTIVITY RESOURCE USAGE MODEL
The activity resource usage model has two resource categories: (1) flexible resources and (2) committed
resources. Flexible resources are resources that are acquired as used and needed. Resource spending is the
cost of acquiring activity capacity. The amount paid for the supply of an activity is the activity cost. For
flexible resources, the resources demanded (used) equal the resources supplied. Thus, for this category, if
the demand for an activity changes across alternatives, then resource spending will change and the cost of
the activity is relevant to the decision.
Committed resources are acquired in advance of usage through implicit contracting, and they are usually
acquired in lumpy amounts. For this category, if a change in demand for the activity requires a change in
resource supply, then the activity cost will be relevant to the decision. This change in cost can occur in
one of two ways:
1. The demand for the resource exceeds the supply (increases resource spending).
2. The demand for the resource drops permanently and supply exceeds demand enough so that
activity capacity can be reduced (decreases resource spending).
Often, committed resources are acquired in advance for multiple periods—before resource demands are
known. Leasing or buying a building are examples.
Teaching hint: As each tactical decision-making problem is worked in class, discuss the qualitative
aspects of the decision (e.g., If a company discontinues a product, what will be the impact on employee
morale?).
IV. ILLUSTRATIVE EXAMPLES OF TACTICAL DECISION MAKING
A. Make-or-Buy Decisions
A make-or-buy decision is a decision of whether to make or buy components or services used in making a
product or providing a service. Outsourcing of technical and professional jobs is becoming an important
make-or-buy issue. Outsourcing refers to the move of a business function to another company, either
inside or outside the United States. Cornerstone 17.1 (p. 887) shows the how and why of structuring the
make-or-buy decision.
The make-or-buy decision problem can also be illustrated in an activity-based costing (ABC) format. The
structure of the problem is the same as that shown in Cornerstone 17.1; however, typically the relevant
costs are more extensive and care must be taken to determine which activities are relevant, and by how
much.
Teaching hint: Exercise 17.10 is a good problem to demonstrate a make-or-buy decision using both the
traditional and ABC approaches.
B. Keep-or-Drop Decisions
A keep-or-drop decision uses relevant cost analysis to determine whether a segment or line of business
should be kept or dropped. In a traditional cost management system, segmented income statements, using
unit-based fixed or variable costs, improve the ability to make keep-or-drop decisions. With keep-or-drop
decisions, revenues and costs that are directly attributable to a segment must be identified. If a segment is
dropped, then only the traceable revenues and costs should vanish. Furthermore, the traceable income
(loss) determines whether a segment should be dropped or kept. If the product (or segment) margin is
positive, then the segment is kept; if negative, then the segment may be dropped. As always, qualitative
factors should be considered in the keep-or-drop decision. Cornerstone 17.2 (p. 891) shows the how and
why of structuring the keep-or-drop decision analysis.
The keep-or-drop decision can also be illustrated in an activity-based costing format. While the use of
ABC does not change the structure or conceptual basis of the keep-or-drop decision, it does give
managers a better idea of just which costs will be affected by the analysis.
Teaching hint: Exercise 17.12 is a good problem to demonstrate a keep-or-drop decision using both the
traditional and ABC approaches.
C. Special-Order Decisions
A special-order decision focuses on whether a specially priced order should be accepted or rejected.
Special-order decisions are examples of tactical decisions with a short-term focus. Increasing short-term
profits is the limited objective represented by this type of decision. Cornerstone 17.3 (p. 894) shows how
and why the special-order decision should be structured.
Teaching hint: Exercise 17.8 is a good problem to demonstrate a special-order decision.
D. Decisions to Sell or Process Further
Often, joint products are sold at the split-off point. But sometimes, it is more profitable to process a joint
product further, beyond the split-off point, prior to selling it. Determining whether to sell or process
further is an important decision that a manager must make. The key point in this decision is that all of the
joint production costs are irrelevant to the sell or process further decision. By the time the split-off point
is reached, all joint costs are sunk, and therefore, irrelevant. Cornerstone 17.4 (p. 897) shows the how and
why of structuring a sell at split-off or process further decision.
Teaching hint: Exercise 17.13 is a good problem to demonstrate a sell or process further decision.
Relevant costs are used in making tactical decisions. Tactical decisions have an immediate view or
limited objective in mind. In making these decisions, however, decision makers should always keep the
decisions within an ethical framework. Reaching objectives is important, but how you get there is perhaps
even more important.
V. INFORMATION ABOUT EXERCISES, PROBLEMS, AND CASES
Exercises and problems are described below and on the following page according to coverage of content,
learning objective(s), and level of difficulty. The time required to solve the problems is roughly
proportional to the level of difficulty.
In general, basic exercises/problems are fairly simple and straightforward. The text material is relatively
brief; only one or two concepts are covered. Basic exercises and problems should take about 15 to 20
minutes each.
Moderate exercises/problems may take longer and involve more concepts. These problems may have a
“twist” and require more thought. Moderate exercises and problems may take 20 to 40 minutes each.
Challenging problems are more comprehensive and may cover more concepts. The text material is
relatively longer and may include some ambiguity. Challenging problems may take 60 to 90 minutes
each.
Cornerstone
Exercise (CS)/
Exercise/
Problem/Case
Topic
Learning
Objective
Degree of
Difficulty
CS 17.1
Make-or-Buy Decision, Alternatives, Relevant Costs
LO 2, 4
Basic
CS 17.2
Keep-or-Drop Decision, Alternatives, Relevant Costs
LO 2, 4
Basic
CS 17.3
Special-Order Decision, Alternatives, Relevant Costs
LO 2, 4
Basic
Cornerstone
Exercise (CS)/
Exercise/
Problem
Topic
Learning
Objective
Degree of
Difficulty
CS 17.4
Sell at Split-Off or Process Further Decision,
Alternatives, Relevant Costs
LO 2, 4
Basic
17.5
Determining Relevant Costs
LO 2
Moderate
17.6
Resource Supply and Usage, Special Order, Relevancy
LO 2, 3, 4
Moderate
17.7
Resource Supply and Usage, Adding a Service Line,
Relevancy
LO 2, 3, 4
Moderate
17.8
Special-Order Decision, Traditional Analysis,
Qualitative Aspects
LO 4
Basic
17.9
Make-or-Buy, Traditional Analysis
LO 2, 4
Basic
17.10
Make-or-Buy, Traditional and ABC Analysis
LO 3, 4
Moderate
17.11
Resource Usage Model, Special Order
LO 3, 4
Moderate
17.12
Keep-or-Drop: Traditional versus Activity-Based
Analysis
LO 3, 4
Moderate
17.13
Sell or Process Further, Basic Analysis
LO 2, 4
Basic
17.14
Relevant Costs, Foreign Trade Zones
LO 2
Basic
17.15
Provide In-House or Outsource Decision, Services,
Qualitative Aspects
LO 4
Moderate
17.16
Special-Order Decision, Services, Qualitative Aspects
LO 4
Moderate
17.17
Keep-or-Drop, Services, Qualitative Aspects
LO 4
Moderate
17.18
CPA-Type Exercise
LO 1, 2
Basic
17.19
CPA-Type Exercise
LO 1, 2
Basic
17.20
CPA-Type Exercise
LO 3, 4
Basic
17.21
CPA-Type Exercise
LO 1, 2
Basic
17.22
CPA-Type Exercise
LO 2
Basic
17.23
Identifying Problems and Alternatives, Relevant Costs
LO 1, 2
Moderate
17.24
Keep-or-Drop for Service Firm, Complementary
Effects, Traditional Analysis
LO 2, 4
Moderate
17.25
Special Order, Traditional Analysis
LO 2, 4
Moderate
17.26
Resource Usage, Special Order
LO 3, 4
Moderate
17.27
Activity-Based Resource Usage Model, Make-or-Buy
LO 3, 4
Moderate
17.28
Make-or-Buy, Traditional Analysis, Qualitative
Considerations
LO 2, 4
Moderate
17.29
Sell or Process Further
LO 4
Moderate
17.30
Plant Shutdown or Continue Operations, Qualitative
Considerations, Traditional Analysis
LO 2, 4
Challenging
17.31
Make-or-Buy, Traditional Analysis
LO 1, 2, 4
Moderate
17.32
Exporting, Foreign Trade Zones
LO 2
Moderate
17.33
Cyber Research Case
LO 1, 2
Challenging
LIST OF ILLUSTRATIONS
Illustration
Topic
Exhibit 17.1
Decision Model: Tactical Decision-Making Process
Exhibit 17.2
Resource Demand and Supply
Exhibit 17.3
Activity and Cost Information