Operational Decision-Making (Short-Term)

In Fixed Costs, Variable Costs and Contribution we introduced the idea of separating fixed costs from variable costs, and showed the difference between using a variable costing approach which attaches only those costs that vary with output level to products, and an absorption costing approach which attaches both fixed and variable costs to products. We also showed how the separation of fixed and variable costs could enable us to construct a simplified cost-volume-profit model in which the effect of product related decisions could be expressed in terms of a single variable: contribution. This section will develop this general approach to provide information for a number of short-term operational decision-making scenarios.

These short-term decisions apply the 'relevant costing' approach introduced in Relevant Costs and Revenues in which only the cash flows that will be affected in the future need to be evaluated.

For these decision scenarios we will retain most of the assumptions introduced in Fixed Costs, Variable Costs and Contribution but we can abandon the single product (or constant mix) assumption needed for simple graphical representation of break-even, and construct a more plausible multiple product setting: