Relevant Costs Used in Incremental Analysis
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Incremental analysis involves looking at make/buy, special order, discontinuing a product or segment of a business, and to sell or process further business decisions. When making this analysis, we are only concerned with the costs that will change if one alternative is selected over another. Any costs that do not change if either alternative is selected are ignored when making this type of decision. For example, a sunk cost is a cost that has already been incurred and will be ignored. Also, when considering two alternative costs that are common to both alternatives will be ignored.
This discussion addresses the following module outcome:
- MO1: Apply incremental analysis to short-term decision-making. (CO1)
- MO2: Distinguish relevant, irrelevant costs. and opportunity costs. (CO1)
Please review all reading and viewings prior to starting your discussions and homework.
Next, address the following question in your initial post:
- How are relevant costs used in incremental analysis? Be sure to distinguish relevant, irrelevant costs, and opportunity costs.
Answer preview
Incremental Analysis
Incremental analysis is a decision-making tool which is utilized in businesses to determine the cost differences between alternatives. The incremental analysis does not consider sunk costs or past costs. Sunk costs include production or fixed costs of producing a good or service. Incremental analysis is useful in drawing of business strategies to make crucial business decisions such as the decision to buy more, hire more or self-produce. Incremental analysis is a problem-solving approach that applies accounting information into decision making. Incremental analysis employs the evaluation of relevant costs to come up with the best alternatives. (Collier, 2015). Relevant costs refer to the avoidable expenses that are used in the making of business decisions. For example, a particular company wishes to use driver-less vehicles in its operations. When this is implemented, the employed drivers…
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