One of the primary functions of management is decision-making which involves selecting future courses of action. These decisions may be repetitive or non-repetitive in nature.
Non-routine decisions that mainly sit with middle-level management include:
In these cases, the management is expected to choose the option that will maximize profits.
Strategic decision-making involves setting long-term goals and ways to achieve them. It is the responsibility of the top executives of the organization. Operational decisions involve day-to-day affairs and activities of the organization.
Tactical decisions involve medium-term decisions that are set and implemented by the middle-level management. Tactical decisions may be repetitive or non-repetitive (non-routine).
The following are examples of non-routine decisions.
1. Accept or Reject a Special Order
There are times when a customer places a special order for the company's products at prices lower than usual. If the company has excess capacity, the acceptance or rejection of the order depends upon the incremental revenues and incremental costs. If incremental revenues exceed incremental costs, the order is accepted. In the event that the company has no excess capacity, incremental costs must include the effect of lost sales as a result of sacrificing regular sales to fill up the special order.
2. Make or Buy a Product Component
The business must choose the option that results in lower costs. Generally, the variable costs of producing the product component are compared with the purchase price of buying it from an outside supplier. Also, avoidable fixed costs and opportunity costs are considered depending on the case.
3. Sell or Process Further
Companies may be faced with the decision to sell the product as is or process it further to be sold at a higher price. The product should be processed further only when the increase in selling price is higher than the additional cost to process the product further.
4. Add or Drop a Segment or Product Line
A business segment or product line should be continued if revenues exceed its costs. In calculating the costs, allocated organization-wide costs should not be considered since these costs will still be incurred by the organization with or without the segment or product line.
5. Product Combination in Maximizing Scarce Resources
When faced upon a decision to choose which product to manufacture and sell in the presence of limited resources (i.e., labor hours, machine hours, space, etc.), the company should choose the product that will generate the higher (or highest) contribution margin per unit of the scarce resource.
All of the above decisions make use of relevant costing concepts. Only costs that differ in choosing one alternative over the other are taken into account. Each type of non-routine decision is discussed in the next lessons.