Managerial Accounting Due tomorrow

Running Head: DIFFERENTIAL ANALYSIS 1

DIFFERENTIAL ANALYSIS 3

Discussion Board

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Differential analysis refers to an examination of the difference between revenue and expense among alternative courses of action. Differential analysis takes place in making decisions by management that concern, making or buying products, dropping or keeping array of products, dropping or keeping customers and accepting or dismissing exceptional customer orders.

The product line refers to a collection of related goods or products. Managers of given firms like Apple Inc have a key role in deciding on whether to keep or drop product lines since the products go through life cycles which may affect the performance of the company, therefore, they may need to be dropped or maintained(Cooper, 2017). Using differential analysis to make this decision: Direct fixed costs should be considered while Allocated fixed costs should not be considered.

Direct fixed costs refer to costs that can be located directly to the product in question hence they are considered in the evaluation to keep or drop a product line while allocated costs cannot be discovered directly to the product in question. Allocated fixed costs are hence given to product lines through the allocation process. This makes them not to be considered in deciding to keep or dropping product lines. Managers compare revenues and costs related to each alternative and select the choice with the highest profit (Klemstine, 2014).

Managers similarly apply profitability as a crucial element to determine if to keep or drop a customer. As opposed to product line decision here, instead of tracing income and expenses related straight to product line the information is tracked directly from the buyer. Allocated fixed costs are allocated to buyers based on sales income. If one customer is eliminated, total allocated costs are directed to other buyers while direct fixed costs directed to the dropped customer are eliminated (Baker, R, 2013)

Opportunity costs refer to benefits that are forgone once a choice or alternative is made or preferred to the other. Opportunity costs are included in the differential analysis and hence differential costs while sunk costs are costs incurred in the parts and cannot be changed by future decisions. Sunk costs are not differential costs (Straus. L, 2015)

In conclusion differential analysis entails recognition of all revenues and expenses that vary from one given choice to the other. Generally managers go for the alternative that yields the highest profit. If the difference lies in the expenses, managers go for alternative with the lowest cost. Opportunity costs are considered as differential costs while the sunk cost is not differential cots. Differential analysis is used to decide on if to retain or drop a customer. Direct costs are terminated if a product is dropped, hence classified to be differential costs.

References

· Klemstine, C. F., & Maher, M. W. (2014). Management Accounting Research (RLE Accounting): A Review and Annotated Bibliography. Routledge.

· Cooper, R. (2017). Target costing and value engineering. Routledge.

· Christensen, T., Cottrell, D., & Baker, R. (2013). Advanced financial accounting. McGraw-Hill.

· Roth, S., Robbert, T., & Straus, L. (2015). On the sunk-cost effect in economic decision-making: a meta-analytic review. Business research, 8(1), 99-138.

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