What is Incremental Analysis?
By Emily James-Blanchard
What is Incremental Analysis? Basically, it’s a managerial decision making process. Decisions are a huge part of being a manager. Decision making does not always involve lots of people and a set schedule, but decisions vary in their complexities and some involve a little research to see if they will work out. There are four steps to incremental analysis. They are very simple: 1.Identify the problem, 2.Determine and evaluate possible courses of action, 3.Make a decision, and 4.Review results of the decision. We, as the accountants, contribute the most to steps 2 and 4. In step 2, we provide relevant data and cost data. These show the expected outcome of the effect on net income. In step 4, we read the internal reports that are the results of the review.
There are three costs that are needed in order to prepare this type of analysis. The first is the relevant cost. These are the types of costs that can change from one alternative to another. Direct materials, direct labor, variable manufacturing costs, and even fixed costs can all change from one product, product line, and/or company every time an analysis is done. The second cost is an opportunity cost. This is a “choosing” concept. In choosing one course of action, another is forfeited. In choosing the safety and health of my family I had to quit my babysitting job so that I can be the mom/wife that I need to be. The cost of that decision in dollars is only 75$ a week, but in a community perspective it means a calmer, more relaxed, mommy that has time to teach (my kids), cook, clean, do homework and still have the energy to hang out with my husband a little in the evenings. The third cost is sunk cost. This is how much has already been put into the venture. All the books, vitamins, toys and food that I purchased for the other kids is a sunk cost. The benefit of that is, is that when Carson is old enough he can play with the toys, my husband...
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