Incremental Analysis

Question 1

What are the steps in Management’s decision making process?

Answer 1

1. Identify the problems and assign responsibility
2. Determine and evaluate possible course of action
3. make a decision
4. review the results of the decision
   
   • accounting’s contribution ususally happens in step 2 - 4

Question 2

What are some short term decision management needs to make

Answer 2

1. adding and dropping a product line (s)
2. make or buy
3. Special orders
4. Utilization of a constrained resource
5. sell or process further

Question 3

What is incremental analysis

Answer 3

• 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

Question 4

What does incremental analysis involve?

Answer 4

estimates and uncertainties

Question 5

Where can data be gathered?

Answer 5

• market analysis
• engineers and
• accountants

Question 6

what is the accountant’s responsibility

Answer 6

the accountant is expected to produce the most reliable information available at the time the decision is made

Question 7

What are the 3 important cost concepts used in incremental analysis

Answer 7

1. 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
2. Opportunity costs
   - chosing one action you may to give up the opportunity to benefit form some other action
3. sunk costs - costs that have already occurred and will not change or be avoided by any future decision

Question 8

What are the 6 most common types of incremental anlsysis

Answer 8

1. accept an order at a special price
2. make or buy component parts or finished products
3. sell products or process them further
4. retain or replace equipment
5. eliminate or retain an unprofitable business segment
6. allocate limited resources

Question 9

What is the layout for accepting an order at a special price

Answer 9

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

Question 10

What is the layout for make or buy

Answer 10

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)

Question 11

Sell Products or Process them further layout for single product case

Answer 11

xx need to add more