In: Accounting
Businesses are always seeking ways to make sound financial business decisions. Whether a manager needs to determine if a product can be produced in-house or outsourced is just one example of the types of financial decisions businesses are often faced with that require careful analysis. In your managerial accounting class you learned about incremental analysis and how it can be used to make these types of decisions. To test your understanding of incremental analysis, your professor has asked you to explain the structure of incremental analysis and illustrate how it can be used by providing an example of its application.
Formulate a thoughtful response in 100–250 words. Include at least one reference.
Let us define incremental analysis once and proceed with the explanation.
Incremental analysis, it uses or takes into consideration only the relevant costs for decision making purposes, that is, only the costs which will be incurred specifically for such a decision will be taken into consideration. This means that the fixed costs are irrelevant in in-house manufacturing or outsourcing because they will be however incurred irrespective of either of the decisions.
Let us take an example,
A company, manufacturers certain product which has 3 processes, the product can be sold even after process 2. In such cases what decision to take depends on the profitability and demand for the product. But the thing to be considered in incremental analysis is that, the fixed cost will be incurred however the product is sold after process 2 or 3, so therefore only the costs which are incurred specifically for process 3 would be considered for decision making.