In the last Unit, we used cost information to analyze product performance. Now we are introduced to analyses that lead to more specific management decision-making

Cost information to analyze product performance

In the last Unit, we used cost information to analyze product performance. Now we are introduced to analyses that lead to more specific management decision-making – Differential analysis. Often, business decisions involve choosing between alternative courses of action, and companies tend to want to find the alternative that offers the highest revenue or the most significant reduction in costs. Non-routine decisions use differential analysis. These include make-or-buy choices, whether to retain or drop a product line, or even if a customer should be retained or dropped. In using differential analysis, common revenues and costs are factored out of the assessment, thereby focusing on revenue and cost information that is specific to a given product, customer, or another point to be analyzed.

It is important to note that sometimes analyses may be done after a company has already started down a particular path and spent money doing so. These costs, referred to as sunk costs, must be ignored in differential analysis. In addition to gathering relevant data to support a decision, management must also consider alternative ways to utilize funds. These other options are opportunity costs.

All of the analyses covered thus far are quantitative. However, qualitative factors are considerable, such as convenience for the customer, company reputation, and environmental considerations. Sometimes these factors are more important than strictly quantitative measures. However, in all situations, managers can make better decisions if they identify all of the quantitative and qualitative consequences of alternative choices.

Reading:

1.  Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Chapter 7 – How Are Relevant Revenues and Costs Used to Make Decisions?
This text explains how to use differential analysis and how to identify relevant costs, also, with illustrations using applied examples.
Optional Video
1.  Lynch, C. (2014, June 23). Differential Analysis – Concepts [Video File].
Discussion #4
Additionally, Continuing with the company in Unit 2 – (Ford Motor Company or Detroit Public Schools). Think about the types of financial data in differential analysis. Propose which specific revenues and costs can be consider in an evaluation to drop or keep a:
·         Customer
·         Product line
In addition, explain sunk and opportunity costs as they relate to your selected company. Are these costs considerable in differential analysis? Why or why not?

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