Short-Term (Direct) vs. Long-Term (Indirect)

Here we have touched upon one of the most significant conflicts that affect the evaluation of decisions, particularly economic decisions. In order to make a decision, the future consequences arising from that decision must be evaluated against alternative options foregone as a consequence of taking the decision. This requires forecasts of future consequences to be estimated.

What will happen in the future is, of course, unknown, and any forecast will rely on subjective judgements and estimates. When attempting to forecast the financial consequences of a decision, it is much easier to justify estimates of the short-term, direct consequences of the decision than the longer-term, indirect consequences.

In the short-term causal links between a particular cost objective (e.g. a product) and the costs directly attributable to it (e.g. direct materials and other variable costs) are easily established, and the changes in these direct costs resulting from a decision (e.g. a change in production volume) can be predicted with a good deal of confidence, and supported with 'objective' cost information as evidence.

However, for any longer-term consequences of a decision that might affect indirect overhead costs it would be much more difficult to provide evidence of a causal link between a particular cost objective (e.g. the product) and overheads costs (e.g. production scheduling costs) that support the entire product range and are usually only assigned to products in a simple pragmatic way to satisfy financial accounting full (absorption) stock valuation requirements.