ACC 240 Discussions Incremental Analysis is Used to Help Companies Make Decisions Involving a Choice Among Alternative Courses of Action

ACC 240 Discussions Incremental Analysis is Used to Help Companies Make Decisions Involving a Choice Among Alternative Courses of Action 

Incremental analysis is used to help companies make decisions involving a choice among alternative courses of action. People use incremental analysis in their own personal decision making as well. Provide a hypothetical example from your personal life of how you might use incremental analysis in making a decision.

ACC 240 Topic 7 DQ 2

Making decisions often involves financial and nonfinancial factors. Provide a hypothetical example from your personal life of a situation in which you would consider both financial and nonfinancial factors. What factors would be considered?

What Is Incremental Analysis?
Incremental analysis is a decision-making technique used in business to determine the true cost difference between alternatives. Also called the relevant cost approach, marginal analysis, or differential analysis, incremental analysis disregards any sunk cost or past cost. Incremental analysis is useful for business strategy including the decision to self-produce or outsource a function.

Incremental Analysis Explained
Incremental analysis is a problem-solving approach that applies accounting information to decision making. Incremental analysis can identify the potential outcomes of one alternative compared to another.

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Relevant Versus Non-Relevant Costs
Analysis models include only relevant costs, and these costs are typically broken into variable costs and fixed costs. Incremental analysis considers opportunity costs—the missed opportunity when choosing one alternative over another—to make sure the company pursues the most favorable option.

Non-relevant sunk costs are expenses already incurred. Because the sunk costs will remain regardless of any decision, these expenses are not included in incremental analysis. Relevant costs are also called incremental costs because they are only incurred when an activity of relevance has been increased or initiated.

Types of Incremental Analysis Decisions
Incremental analysis helps companies decide whether or not to accept a special order. This special order is typically lower than its normal selling price. Incremental analysis also assists with allocating limited resources to several product lines to ensure a scarce asset is used to maximum benefit.

Decisions on whether to produce or buy goods, scrap a project, or rebuild an asset call for incremental analysis on the opportunity costs. Incremental also analysis provides insight into whether a good should continue to be produced or sold at a certain point in the manufacturing process.

Example of Incremental Analysis
As an example of incremental analysis, assume a company sells an item for $300. The company pays $125 for labor, $50 for materials, and $25 for variable overhead selling expenses.

The company also allocates $50 per item for fixed overhead costs. The company is not operating at capacity and will not be required to invest in equipment or overtime to accept a special order it receives. Then, a special order requests the purchase of 15 items for $225 each.

KEY TAKEAWAYS
Incremental analysis helps to determine the cost implications of two alternatives.
It is also known as the relevant cost approach, marginal analysis, or differential analysis.
Non-relevant sunk costs, or past costs, are not included in the analysis.
Incremental analysis also assists with allocating limited resources to product lines to ensure a scarce asset is used to maximum benefit.

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