Incremental Analysis Flashcards
What are the steps in Management’s decision making process?
- Identify the problems and assign responsibility
- Determine and evaluate possible course of action
- make a decision
- review the results of the decision
- accounting’s contribution ususally happens in step 2 - 4
What are some short term decision management needs to make
- adding and dropping a product line (s)
- make or buy
- Special orders
- Utilization of a constrained resource
- sell or process further
What is incremental analysis
- the process used to identify the financial expenses that change under alternative courses of action
- ie whether to lease or buy a car
- sometimes both costs and revenues vary, sometimes or only costs OR revenues vary
What does incremental analysis involve?
estimates and uncertainties
Where can data be gathered?
- market analysis
- engineers and
- accountants
what is the accountant’s responsibility
the accountant is expected to produce the most reliable information available at the time the decision is made
What are the 3 important cost concepts used in incremental analysis
- Relevant costs (only factors considered are: 1. costs and revenus that are different for each alternative, 2. costs and revenues tat will occur in the future
- Opportunity costs
- chosing one action you may to give up the opportunity to benefit form some other action - sunk costs - costs that have already occurred and will not change or be avoided by any future decision
What are the 6 most common types of incremental anlsysis
- accept an order at a special price
- make or buy component parts or finished products
- sell products or process them further
- retain or replace equipment
- eliminate or retain an unprofitable business segment
- allocate limited resources
What is the layout for accepting an order at a special price
Reject order Accept order Inc. R & C
Revenue 0 $22,000 $22,000
Costs 0 $16,000 (16,000)
Net inc 0 6,000 6,000
* net income will increase in this example
What is the layout for make or buy
Make buy Inc. cost(savings)
Dir mat $50,000 0 $50,000
DIr Lab 45,000 0 75,000
V man Cost 40,000 0 40,000
Fixed Man cost 60,000 50,000 10,000
Purchase price 0 200,000 (200,000)
total annual cost 225,000 250,000 $(25,000)
Sell Products or Process them further layout for single product case
xx need to add more