CHAPTER 21
activity resource usage model and
tactical decision making
questions for writing and discussion
 

1. Tactical decision making is choosing among alternatives with an immediate or limited end in mind.

2. Tactical decisions should support the overall strategic objectives of an organization. Often, the strategic objectives are served by small-scale actions. For example, making a part instead of buying it may lower costs of production and thus serve the strategic cost leadership objective. Or it may serve the 
objective of differentiation by helping to produce a higher-quality final product than produced by competitors.

3. Tactical cost analysis is the use of relevant cost data to identify the alternative that provides the greatest benefit to the organization.

4. Steps 3–5 are the major components of tactical cost analysis: predicting costs, comparing relevant costs, and selecting the lowest cost alternative (or the alternative with the greatest benefit).

5. There is no correct answer to this question. I (second author) have used this as a writing assignment for several years. It has been very successful; students enjoy analyzing their own decisions, whether it is buying a car, moving from the dorm into an apartment, or buying a puppy. Sometimes, the application of the model leads to new insights into their problems.

6. Relevant costs and revenues are future costs and revenues that differ across alternatives.

7. Depreciation on an existing asset represents an allocation of a past cost. Past costs are never relevant.

8. A future cost that is not relevant is a future cost that does not differ across the alternatives being considered. For example, rent on a factory in a keep-or-drop decision is a future cost, but it will be there whether one of the factory’s products is dropped or kept.

9. Disagree. Relevant costs are just part of the overall tactical decision-making model. Strategic effects and other qualitative factors may affect the decision. The effect may be such that a higher-cost alternative may be chosen.

10. Yes, direct materials can be irrelevant. In a make-or-buy decision, any direct materials already in inventory are irrelevant.

11. In a make-or-buy decision, the salary of the production supervisor would be fixed but relevant to the decision.

12. Depreciation is relevant if it is a future cost that differs across alternatives. In most cases, this would not be a factor because it entails the acquisition of multiperiod capacity and really belongs to the capital expenditure decision domain.

13. The only role of past costs is predictive. They can be used to help predict future costs.

14. Flexible resources are relevant whenever the demand for an activity changes across alternatives. Resource spending will differ across alternatives, making the cost of the activity relevant.

15. Typically, committed resources acquired through implicit contracting are acquired in lumpy amounts and are not formal commitments. Thus, if changes in demand across alternatives produce a change in resource supply, then resource spending will also change, making the cost relevant. Usually, the cost of committed resources is a sunk cost (since they are acquired in advance). Reductions in demand typically do not lead to reductions in resource spending. Increases in demand beyond the activity capacity usually mean a major resource expenditure—a decision that is outside the domain of tactical decision making and more in the domain of strategic analysis.

16. A functional-based make-or-buy analysis focuses on unit-level activities and directly attributable fixed costs and assumes that the costs of all other nonunit-level activities are irrelevant. An activity-based analysis exploits activity cost behavior to identify relevant costs.

17. Activity-based segmented reports trace costs to segments using activity drivers and provide a more accurate assessment of profitability. Additionally, the use of the activity resource usage model allows a manager to more fully assess the changes in resource spending that will occur if a segment is dropped.

18. Joint costs are present whether the product is processed further or sold at split-off and are not relevant.

19. If a firm has unused production capacity and sufficient unused activity capacity, a one-time special order may bring in more revenues than the increase in resource spending needed to fill the order. In this case, short-term profits will increase.

Exercises
21–1

1. Problem: How to obtain additional space needed for warehousing, offices, and the production of plastic moldings.

2. Alternatives identified by Norton’s managers:

a. Build its own facility with sufficient capacity to handle current and immediate foreseeable needs.

b. Lease a larger facility and sublease its current facility.

c. Lease an additional, similar facility.

d. Lease an additional building that would be used for warehousing on