Chapter 7 Notes

Chapter 7 Notes - Managerial Accounting: Chapter 7...

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Managerial Accounting: Chapter 7 Incremental Analysis Management’s Decision-Making Process: Decision-making is an important management function that does not always follow a set pattern Decisions vary significantly in scope, urgency, and importance Steps in management’s decision-making process: o Identify the problem and assign responsibility o Determine and evaluate possible courses of action o Make a decision o Review results of the decision Accounting helps management in making decisions primarily by evaluating possible courses of action (step2) and reviewing results (step 4). Both financial and nonfinancial information are considered in decision-making . o Financial information includes revenues and costs as well as their effect on profitability. o Nonfinancial information relates to factors such as the effect of the decision on employee turnover, the environment, or company image. Incremental Analysis Approach: Decisions involve a choice among alternative courses of action Financial data relevant to a decision are the data that vary in the future among alternatives o Both costs and revenues may vary or o Only revenues may vary or o Only costs may vary Process used to identify the financial data that change under alternative courses of action Identifies the probable effects of decisions on future earnings Involves estimates and uncertainty Incremental analysis is also called differential analysis because it focuses on differences Uses three important cost concepts
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o Types of Incremental Analysis: Accept an order at a special price Make or buy components or finished products Sell products or process further Retain or replace equipment Eliminate an unprofitable business segment Allocate limited resources Accept an Order at a Special Price: Obtain additional business by making price concessions to a specific customer Assumes sales of the product in other markets would not be affected by this special order
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Chapter 7 Notes - Managerial Accounting: Chapter 7...

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