ABSTRACT

Chapter 2 briefly mentioned four basic strategic decisions that companiescommonly make with standard cost information: 1. Product emphasis 2. Product pricing 3. Additions or deletions of a product 4. Capital investment and process improvement decisions

Even if a company uses direct or marginal costing to determine relevant information regarding the expected incremental cash flow, it may fail to recognize the predictable effect of a limited or constrained resource. If we define relevant information as the predicted future costs and revenues that will differ among alternatives (the definition given in Chapter 2), and all dependent systems have a limiting factor (whether internal to the organization or external), then the following is true: Failing to recognize the effect of the limited resource guarantees that we will often choose alternatives that are less than optimal and perhaps even detrimental. The following case illustrates all four of the strategic decisions and their impact on a company that fails to consider their organizational constraints.