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Acct209Weygandt - Managerial Accounting Weygandt Kieso...

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Chapter 9 Incremental Analysis Managerial Accounting Weygandt, Kieso, & Kimmel
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Management’s Decision- Making Process Management’s decision-making process frequently involves the following steps: 1 Identify the problem and assign responsibility. 2 Determine and evaluate possible courses of action. 3 Make a decision. 4 Review results of the decision.
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Management’s Decision- Making Process In making decisions, management ordinarily considers both financial and nonfinancial information. Although nonfinancial information can be as important as, and in some cases more important than, financial information, the following discussion will primarily be limited to financial information that is relevant to decisions.
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Incremental Analysis Incremental analysis helps identify the financial data that change under alternative courses of action. In some cases, both costs and revenues will change under alternative choices. In other cases only costs or revenues will vary. It is important to recognize that variable costs may not change under the alternatives, and fixed costs may change.
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How Incremental Analysis Works The basic approach in incremental analysis : Alternative Alternative Net Income A B Increase (Decrease) Revenues $125,000 $110,000 $(15,000) Costs 100,000 80,000 20,000 Net income $ 25,000 $ 30,000 $ 5,000 In this illustration, alternative B is being compared with alternative A. The net income column shows the differences between the alternatives. Alternative B will produce $5,000 more net income than alternative A.
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Key Cost Concepts in Incremental Analysis In incremental analysis, the only factors to be considered are those costs and revenues that differ across alternatives. Those factors are called relevant . Costs and revenues that do not differ across alternatives can be ignored when trying to chose between alternatives. Three important cost concepts used in incremental analysis follow:
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Incremental Analysis Incremental analysis involves not only identifying relevant revenues and costs, but also determining the probable effects of decisions on future earnings. Data for incremental analysis often involves estimates and uncertainty. Gathering data may involve market analysts, engineers, and accountants.
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Types of Incremental Analysis A number of different types of decisions involve incremental analysis. The more common types of decisions are whether to: 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 an unprofitable business segment.
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Accept an Order at a Special Price Sometimes a company may have an opportunity to obtain additional business if it is willing to make major price concessions to a specific customer.
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