Accounting: Tools for Business Decision Making

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Incremental Analysis and Capital Budgeting Section 1—Incremental Analysis A. Management’s Decision-Making Process. 1. The steps are: a. Identify the problem and assign responsibility. b. Determine and evaluate possible courses of action. c. Make a decision. d. Review results of the decision. B. Accounting’s contribution to the decision-making process occurs primarily in steps (b) and (d). See Illustration 23-1, page 1112 B. The Incremental Analysis Approach. 1. The process used to identify the financial data that change under alternative courses of action is called incremental analysis. 2. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Incremental analysis sometimes involves changes that might seem contrary to your intuition. For example, sometimes: a. Variable costs do not change under the alternative courses of action. b. Fixed costs do change. 4. Accept an order at a special price. a. The relevant information is the difference between the variable manufacturing costs to produce the special order and expected revenues. b. If other sales are affected, then the company would have to consider the lost sales in making the decision. c. If the company is operating at full capacity, it is likely that the special order would be rejected. Illustration 23-3, pg. 1114
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Chapter%2023%20class%20notes%20Kimmel[1] - Chapter 23...

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