Discussion Assignment
Making business decisions involves choosing between alternative courses of action. Many factors affect business decisions, yet analysis typically focuses on finding the alternative that offers the highest return on investment or the greatest reduction in costs. Some decisions are based on little more than an intuitive understanding of the situation because available information is too limited to allow a more systematic analysis. In other cases, intangible factors such as convenience, prestige, and environmental considerations are more important than strictly quantitative factors. In all situations, managers can reach a sounder decision if they identify the consequences of alternative choices in financial terms. This unit
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First, it is important to know exactly what the differential analysis is referred to.
Business organizations usually make many regular decisions during their activity, but when an organization wants to make a specific operational decision, it requires distinguishing the appropriate cost elements to a particular management decision. One of the practical tools in the decision-making process is to compare the costs of a particular alternative with that of other alternatives, which is known as the differential analysis.
Differential costs are the costs that can be avoided and are varied from one alternative to another. In other words, they are the costs which are borne by the company only if an alternative is chosen, whether these costs are variable or fixed (Kumar, n.d).
Differential analysis is useful in many situations faced by the management and it has to choice between different alternatives for each situation to make the necessary decision. Some of these situations are as follows:
1. Dropping or keeping
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(2017). Differential, opportunity and sunk costs - explanation and examples. April 17, 2017. Retrieved from: http://www.accountingformanagement.org/differential-opportunity-and-sunk-costs/
AccountingExplained.com. (n.d.). Decision to Add or Drop Product Line. Retrieved from:http://accountingexplained.com/managerial/relevant-costing/add-or-drop-product-line
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137
Kumar, Pranav. (n.d.). Differential Cost Analysis: Meaning and Its Practical Applications. YourArticleLibrary.com. Retrieved from: http://www.yourarticlelibrary.com/cost-accounting/differential-cost-analysis/differential-cost-analysis-meaning-and-its-practical-applications/62504/
Lumen Learning. (n.d.). Managerial Accounting. Chapter 10: Differential Analysis (or Relevant Costs) Retrieved from: https://courses.lumenlearning.com/managacct/chapter/differential-analysis-and-its-application-to-managerial-decision-making/
Wilkinson, James. (2013). Make-or-Buy Business Decision. The Strategic CFO. July 24, 2013. Retrieved from:
A cost-benefit analysis is “whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks” (Benefit-Cost Analysis, n.d.). The analysis estimates the economic value placed upon a
Differential Analysis-status quo compared to the revenue and costs of other alternatives in decision making. Short term and long term
"Health Insurance Costs, Premiums, Deductibles, Co-Pays & Co-Insurance." Debtorg News. N.p., n.d. Web. 01 May 2014.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or received in the future has less monetary value if that same money was to be received or paid today (The Meaning of Discounted Cash Flow, 2014). This cash flow evaluation helps managers in their determination whether or not to invest in research and development, purchase more equipment, enlarge floor space, and increase laborers, or instead, retain net profits. Either way, the DCF valuation gives
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
“Marginal analysis involves changing the value(s) of the choice variable(s) by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems)” (Thomas & Maurice, 2012, pp. 91). Marginal analysis is known as “the central organizing principle of economic theory” for its importance and applicability to many aspects of our daily lives as well as our careers (Thomas & Maurice, 2012, pp. 94). The key concepts of marginal analysis include total benefit, total cost, marginal benefit, marginal cost and net benefit. These concepts all come together to play a significant role in the use of marginal analysis to reach the optimal desired outcome.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
The four techniques used for analyzing the costs and benefits of a proposed system is break-even analysis, payback analysis, cash-flow analysis, and present value analysis. Break-even analysis is a supply-side analysis. Only the costs of the sales is analyze with break-even. It does not analyze how demand may be affected at different price levels. A strength of break-even analysis it’s relatively simple concept and the formula can be easily understood and used by most people. Another strength is that it provides vital information when making a decision. Weaknesses of break-even analysis is it assumes that all output will be sold. It is difficult to apply break-even analysis when a company sells more than one product. Break-even cannot show what will definitely happen. The payback analysis method is the simplest analysis method to use when looking at one or more major project options. It tells you how long it will takes to earn back the money you will spend on the project. Payback analysis helps you decide you whether or not you should undertake the project. The biggest strength of the payback method is that it is simple. The payback analysis method is used to make quick evaluations of projects. Weaknesses of the payback method is that the method ignores the time value of money. The payback analysis method does not consider cash inflows from a project that may occur after the initial investment has been recovered. A cash flow analysis is a listing of the flows of cash into and out of the project. This is like your checking account at your bank. Deposits are the cash inflows and withdrawals are the cash outflows. The balance in your checking account is your net cash flow at a specific point in time...
Differential calculus is a subfield of Calculus that focuses on derivates, which are used to describe rates of change that are not constants. The term ‘differential’ comes from the process known as differentiation, which is the process of finding the derivative of a curve. Differential calculus is a major topic covered in calculus. According to Interactive Mathematics, “We use the derivative to determine the maximum and minimum values of particular functions (e.g. cost, strength, amount of material used in a building, profit, loss, etc.).” Not only are derivatives used to determine how to maximize or minimize functions, but they are also used in determining how two related variables are changing over time in relation to each other. Eight different differential rules were established in order to assist with finding the derivative of a function. Those rules include chain rule, the differentiation of the sum and difference of equations, the constant rule, the product rule, the quotient rule, and more. In addition to these differential rules, optimization is an application of differential calculus used today to effectively help with efficiency. Also, partial differentiation and implicit differentiation are subgroups of differential calculus that allow derivatives to be taken to more challenging and difficult formulas. The mean value theorem is applied in differential calculus. This rule basically states that there is at least one tangent line that produces the same slope as the slope made by the endpoints found on a closed interval. Differential calculus began to develop due to Sir Isaac Newton’s biggest problem: navigation at sea. Shipwrecks were frequent all due to the captain being unaware of how the Earth, planets, and stars mov...
Financial analysis is an estimation of the financial viability of an investment option, the financial benefit from its implementation, stability. It looks at the total costs, the benefits of using and supporting the solution, and the total cost of the changes
Schroeder, Richard G., Myrtle Clark, and Jack M. Cathey. Financial Accounting Theory and Analysis: Text and Cases. 10th ed. Hoboken, NJ: John Wiley & Sons, 2009. 97. Print.
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.