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 costs
Irrelevant – already paid in full, with a 100% charge if cancelled
Printing tickets
Irrelevant – tickets already printed and cannot be reused
Performing artists fees
Irrelevant – 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 costs
Irrelevant – 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 decisions
Long 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
Each decision involves relatively
small amounts of monetary
value
Relatively easy to change
decision, withdraw from activity
if the business environment
changes
Strategic in nature, impact on
corporate level objectives and
goals i.e. making the best of
resources in the long term
Each decision can involve large
sums of monetary value
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 Hotel
Bread Rolls
Purchase price
Variable material
cost
Variable labour
Fixed costs avoided
if not making
Total relevant costs
MAKE
30,000
BUY
30,000
$0.15
$1,800
$1,200
$1,300
$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 Retreats
Revenue
India
£,000s
400
Variable transport
costs
80
Variable hospitality
costs
Fixed resort cost
Fixed Head Office
costs
Total Costs
Operating profit/loss
by location
Portugal
£,000s
700
35
Turkey
£,000s
500
75
200
420
225
30
40
35
100
410
100
595
100
435
-10
105
65
Totals Notes:
£,000s
An all-inclusive price covering
plane, transfers, accommodation,
full board, local representative and
1600 yoga teacher
Includes plane and transfers per
190 person
Includes resort accommodation and
845 meal costs
Local representative & yoga
105 teacher
Fixed HO costs shared by 3
300 locations
1440
160
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Close the Indian operation
Peace Yoga Retreats
Portugal
Turkey
£,000s £,000s
Totals Notes:
£,000s
Revenue
Variable transport
costs
Variable hospitality
costs
700
500
1200
35
75
110
420
225
645
Fixed resort cost
Fixed Head Office
costs
Total Costs
Operating profit by
location
40
35
75
150
645
150
485
300
1130
55
15
An all-inclusive price covering
plane, transfers, accommodation,
full board, local representative
and yoga teacher
Includes plane and transfers per
person
Includes resort accommodation
and meal costs
Local representative & yoga
teacher
Fixed HO costs shared by 2
locations
Profit is much lower without
70 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 Retreats
Revenue
Variable transport
costs
Variable hospitality
costs
Fixed resort cost
Fixed Head Office
costs
Total Costs
Operating profit by
location
India
£,000s
400
80
Portuga
l
£,000s
700
35
Turke
y
£,000s
500
75
200
420
225
30
40
35
310
90
495
205
335
165
Totals Notes:
£,000s
An all-inclusive price covering
plane, transfers, accommodation,
full board, local representative and
1600 yoga teacher
Includes plane and transfers per
190 person
Includes resort accommodation and
845 meal costs
Local representative & yoga
105 teacher
300
1440
Not a location operating cost
All locations make a positive input
160 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.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers