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Incremental Analysis

In: Business and Management

Submitted By ritamae
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Incremental analysis is sometimes referred to as incremental cost analysis, relevant cost analysis, or differential cost analysis. Incremental analysis is an accounting tool used to assist decision making by assessing the impact of small or marginal changes. However, incremental analysis is applicable to short and long-term issues. Using accounting information that provides important financial data such as costs and revenues is very important to companies. It helps the managers define what their options are on how to minimize cost increasing their profits. The decision making may involve whether to accept special order, make or buy, sell or process further, retain or replace equipment to name a few (Kimmel, Weygandt & Kiesco, 2011).
Incremental Analysis
In most cases management usually have to face two types of decisions: short term, which involves the normal operation of the company and long-term capital investments. However, the short-term decision can be carried out and then made retroactive actions to carry out the strategic goals of the company. Whereas the long-term decision making, there are several resources involved and sometimes it includes rough and difficult processes. Keep in mind that in some instance, short term decisions can affect different areas that make up an organization such as sales, finance, production, and human resources.
The different types of decisions that involve incremental analysis are accept as an order at a special price, make or buy, sell or process further, retain or replace equipment, eliminate an unprofitable business segment, and allocate limited resources according to Kimmel, Weygandt and Kieso (2011). The presentation and management of the data should be structured so that it can be analyzed with the incremental analysis. For example, only worry about the costs or revenues that will be affected by the decision which management plan to choose. The incremental analysis is to determine the amount, whether increased or decreased earnings by a specific decision, as well as increase or decreases of changes in costs resulted from the same decision. If operated in income with changes in the cost movements are compared, it can be a spread called incremental profit or loss, as the effects leading to the decision.
Comprehensive Analysis
Unlike incremental analysis that deals with understanding the effects of decisions on future earnings, comprehensive analysis looks at every detail the company’s financial situation. The goal of such analysis is to provide a complete picture of the financial status of a company both in the current time and projected into the future, (Wise Geek, 2014). This process requires an enormous amount of data and is time consuming. Management uses the data collected to compute financial ratios to determine the strength of the company’s financial status such as “profitability, liquidity, debt levels, and cash flow,” (Wise Geek, 2014).
Although comprehensive analysis is useful in understanding the strength of the company’s financial status, the outcomes are only as correct as the data provided for the evaluation. In addition, the results cannot show management what type of actions to take regarding making changes in the business. “That is why one of the final steps of comprehensive analysis should be comparing these ratios to the ratios of other financial leaders within the same industry,” (Wise Geek, 2014). Conducting industry comparisons provide businesses with valuable information in terms where the company is flourishing and what processes or operations are in need of review.
Effectiveness of Incremental and Comprehensive Analysis
Incremental analysis is most widely used to determine changes within the company that are considered marginal. In incremental analysis, the objective is to determine what results will occur due to a certain decision. Incremental analysis can be an effective tool in assisting with long term or short term decision making. Comprehensive analysis is more intricate then incremental analysis, as it requires an extensive assessment of all relevant financial reports to aide in decision making. Comprehensive analysis is used to determine the present and future financial status of a company. Once data has been accessed the ratios calculated are compared to other companies within the same industry. With this basis for comparison, a company can figure how strong it appears to outside investors, and make changes accordingly. One of the major roles of management is to identify strategies to employ in the decision making processes that lead to an efficient use of resources and increased profitability. Incremental and comprehensive analyses are two important decision making theories that management uses to aid in identifying business strategies and decisions making for betterment of their business.

References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons.
Rashid, M. M., Mitchell, Z. W., & Sprouls, E. P. (2011). Teaching incremental analysis: Lessons learned. IIE Annual Conference. Proceedings, 1-5. Retrieved from http://search.proquest.com/docview/1190409965?accountid=458
Wise Geek. (2014). what is Comprehensive Analysis? Retrieved from: http://www.wisegeek.com/what-is-comprehensive-analysis.htm

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