Sunday, February 8, 2009

Incremental Analysis Example

Incremental analysis, also referred to as marginal or differential cost analysis, is when an accountant focuses on the changes in revenues and costs that are a planned result of a specified action in the company

The following steps are commonly used in incremental analysis

  1. Arrange all costs associated with each alternative action desired.
  2. Remove the sunk costs and drop any costs shared between alternative decisions.
  3. Choose the best alternative according to the cost data.
Incremental analysis provides a way to illustrate with numbers business decisions. Decision-making involves choosing between different alternatives that will have different cost factors.. The main focus of incremental analysis is to examine what is most different between the alternatives in terms of three major accounting amounts:

  1. Revenue differences 
  2. Cost differences
  3. Cost savings differences 

Related Accounting Tutorials:
Recording Opportunity Costs
What is Opportunity Cost?

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