ACCT20001 Chap.9 Short Term Decisions
Short Term Decisions
Everything earlier in the subject aimed at an accurate total cost. This chapter applies a different filter entirely, and the shift catches students out because the numbers on the costing report are suddenly the wrong numbers to use. For a decision, a cost matters only if it satisfies two conditions at once: it lies in the future, and it differs between the alternatives being compared.
Costs already incurred cannot be changed by any choice made now. Costs locked by a contract already signed lie in the future but are altered by no option on the table. Costs that are identical under both options add the same figure to each column and change nothing.
Running the other way is opportunity cost, which never appears in the ledger and is nevertheless relevant by both tests, because the benefit given up by choosing one option is both future and different. The subject's own roadmap lists the three questions this week answers, and they are the three familiar framings: make or buy, accept a special order, and which product to prioritise.
Each uses the same filter, and each carries a characteristic trap built out of an allocated fixed cost, a regular selling price, or a contribution margin quoted per unit of product rather than per unit of the scarce resource.
What this chapter covers
- 01
The two tests for relevance, and why they are applied together
- 02
Sunk cost, committed cost and common cost: three classes that fall out
- 03
Opportunity cost, and why a cost absent from the ledger can still be relevant
- 04
Make or buy, and the allocated overhead that continues either way
- 05
Special orders, spare capacity, and when the regular price is not the benchmark
- 06
Product mix, and ranking on contribution per unit of the scarce resource
- 07
Dropping a segment, and where its fixed costs actually go
- 08
Why a reported full cost per unit answers a different question
- 09
Writing a two-column comparison that an examiner can follow
Rank two products when a machine is the binding constraint
- 1Identify the binding constraint. Machine hours are scarce, so the resource being rationed is hours rather than units.
- 1Restate each contribution in terms of that resource: P earns $18 over 0.5 hours, which is $36 an hour.
- 1Do the same for Q: $30 over 1.2 hours, which is $25 an hour.
- 1Rank and quantify: P is worth $11 more per machine hour, so hours go to P until its demand is met and only then to Q.
Key terms
- Relevant cost
- A cost that lies in the future and differs between the alternatives under comparison, and is therefore capable of changing the decision.
- Sunk cost
- A cost already incurred, which no present alternative can recover and which is therefore never relevant to a decision.
- Committed cost
- A future cost fixed by an agreement already in place, so no option currently under consideration alters it.
- Opportunity cost
- The benefit given up by choosing one alternative over the next best, relevant even though it never appears in the accounts.
- Avoidable cost
- A cost that would genuinely cease under one of the alternatives, and therefore belongs in the comparison.
- Special order
- A one-off order at a price below the regular one, assessed on incremental cost and on the contribution displaced if capacity is short.
- Binding constraint
- The scarce resource that limits output, and the unit in which contribution must be expressed before products are ranked.
- Incremental analysis
- A comparison built only from the amounts that change between two alternatives, rather than from full cost totals.
Short Term Decisions FAQ
Are fixed costs always irrelevant to a short-term decision?
No, and assuming so is the standard error. Relevance is decided by the two tests, not by the behaviour label, so a fixed cost that genuinely disappears under one alternative is both future and different and belongs in the comparison. A supervisor's salary that would end if a component were bought in is the usual illustration.
The correct instinct is to ask what happens to each cost under each option rather than to sort costs by behaviour first.
Why is the regular selling price sometimes irrelevant to a special order?
Because it describes a different transaction. With spare capacity, accepting the order displaces no existing sale, so the question is only whether the price exceeds the additional cost of filling it plus any one-off outlay.
The regular price becomes relevant the moment capacity is tight, because then each unit sold to the new customer is a unit not sold to an existing one, and the contribution given up enters the comparison as an opportunity cost.
A product line shows a loss on the full cost report. Should it be dropped?
Only if its avoidable cost exceeds its revenue. A line earning a positive contribution is helping to pay for allocated costs that will continue after it goes, and dropping it shifts that block onto the remaining products, which then look less profitable in turn. The first question to ask is how much of the reported full cost would actually disappear, and the answer usually reframes the decision entirely.
How do I spot an opportunity cost in an exam question?
Look for capacity that is being used up. A question that mentions an idle building, a spare shift, a machine already at its limit or a customer currently being served is signalling that choosing one option consumes something the other option could have used.
If accepting an order displaces an existing sale, the contribution given up on that sale is an opportunity cost and belongs in the comparison even though no invoice will ever record it.
Exam move
The habit that carries this chapter is physical: draw two columns, label them with the alternatives, and admit a number only after asking whether it is future and whether it differs. Practise deliberately on questions that hand you a full cost per unit, because the discipline being tested is refusing to use it.
Rehearse the opportunity-cost cue as well: whenever a question mentions idle capacity, a spare shift or a customer waiting, decide explicitly whether anything is being given up. Finish every answer with one sentence stating the difference in dollars and the recommendation, since an incremental analysis that stops at the numbers has left the last mark on the table.
Working through Short Term Decisions in ACCT20001? Sia is AskSia’s AI Accounting tutor — ask any ACCT20001 Short Term Decisions question and get a clear, step-by-step explanation grounded in how ACCT20001 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
