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    Discussion Assignment Unit 4

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    Shar Mie Chiccobyvu
    Differential analysis is the process by which managers determine how costs, revenues, and profits are affected by choosing one alternative over another. It involves estimating and comparing the costs and revenues of various options against the status quo. Managers must consider both short-term and long-term decisions, taking into account factors like the timing of cash flows and the time value of money. Differential costs are those that change depending on the option chosen, including variable costs and direct fixed costs. Managers use differential analysis to decide whether to continue or discontinue products/segments by comparing the contribution margins of alternatives and selecting the highest. Sunk costs that cannot be influenced by present decisions are irrelevant, while opportunity costs of forgone alternatives must be

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    Discussion Assignment Unit 4

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    Shar Mie Chiccobyvu
    23 views3 pages
    Differential analysis is the process by which managers determine how costs, revenues, and profits are affected by choosing one alternative over another. It involves estimating and comparing the costs and revenues of various options against the status quo. Managers must consider both short-term and long-term decisions, taking into account factors like the timing of cash flows and the time value of money. Differential costs are those that change depending on the option chosen, including variable costs and direct fixed costs. Managers use differential analysis to decide whether to continue or discontinue products/segments by comparing the contribution margins of alternatives and selecting the highest. Sunk costs that cannot be influenced by present decisions are irrelevant, while opportunity costs of forgone alternatives must be

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    Differential analysis is the process by which managers determine how costs, revenues, and profits are affected by choosing one alternative over another. It involves estimating and comparing the costs and revenues of various options against the status quo. Managers must consider both short-term and long-term decisions, taking into account factors like the timing of cash flows and the time value of money. Differential costs are those that change depending on the option chosen, including variable costs and direct fixed costs. Managers use differential analysis to decide whether to continue or discontinue products/segments by comparing the contribution margins of alternatives and selecting the highest. Sunk costs that cannot be influenced by present decisions are irrelevant, while opportunity costs of forgone alternatives must be

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    23 views3 pages

    Discussion Assignment Unit 4

    Uploaded by

    Shar Mie Chiccobyvu
    Differential analysis is the process by which managers determine how costs, revenues, and profits are affected by choosing one alternative over another. It involves estimating and comparing the costs and revenues of various options against the status quo. Managers must consider both short-term and long-term decisions, taking into account factors like the timing of cash flows and the time value of money. Differential costs are those that change depending on the option chosen, including variable costs and direct fixed costs. Managers use differential analysis to decide whether to continue or discontinue products/segments by comparing the contribution margins of alternatives and selecting the highest. Sunk costs that cannot be influenced by present decisions are irrelevant, while opportunity costs of forgone alternatives must be

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Discussion assignment unit 4

    The process whereby management determines how costs, revenues and profit are affected by

    choosing one alternative over another is called differential analysis (Principles of Accounting,

    Volume 2, Managerial Accounting, n.d). It is the process of estimating costs and revenues of

    alternative actions available against the status quo. This can be done for either short term or

    long term decisions. The difference between short term and long term decisions is whether

    the timing of cash receipts and disbursements is crucial (Walther & Skousen, 2009). This is

    whether the time value for money is important or not.

    Differential costs are costs that change with changes in course of action. Variable costs and

    direct fixed costs can both be differential costs. Variable costs are differential if the decision

    involves changes in volume (Fitriah, Rosdiana, Iss, Helliana, & Septidiana , 2020). If a

    machine replacement doesn’t affect the volume of output, or the variable costs per unit then

    the variable costs will not be differential.

    Managers need to make decisions on whether to continue producing a product, operating in a

    certain locality or to close the entire segment of the business. Just like any other decision, in

    selecting between alternatives relevant costs and revenues need to analysed. These are costs

    and revenues that differ between alternatives. One approach is comparing the contribution

    margins of the alternatives. Comparing the with and without scenario of the contribution

    margins is done. The scenario with the largest contribution margin is selected because it

    provides the largest contribution to the fixed costs (Principles of Accounting, Volume 2,

    Managerial Accounting, n.d). Variable costs and direct fixed costs are directly linked to each

    customer, thus if a customer is dropped these are also dropped. These two are differential

    costs.
    Costs that have been incurred in the past and they cannot be influenced by present or future

    decisions are called sunk costs (Zoger & Zoger , 2006). Looking at Dairibord Zimbabwe

    limited, if it wants to drop the product yoghurt, it has some sunk costs that the company need

    not to include. This include the cost of purchasing the plant, the cost of constructing cold

    chains, the costs of developing the yoghurt recipe, the designs for yoghurt packaging just to

    name a few. These costs are not differential costs as they remain the same for any decision

    undertaken. However, opportunity costs are those costs foregone when one alternative is

    chosen over another (Zoger & Zoger , 2006). These are differential costs, hence need to be

    included when doing differential analysis. Looking at the Dairibord Zimbabwe Limited, the

    opportunity costs of dropping the production of yoghurt include in income from sales of the

    product.

    Management need to focus on relevant costs in making decisions because these costs are

    affected by decisions made. Irrelevant costs include the sunk costs, committed costs or

    overhead costs that cannot be avoided.

    (word count 440)

    References

    Fitriah, E., Rosdiana, Y., Iss, A., Helliana, & Septidiana , Y. (2020). Analysis of the

    application of differential accountinginformation in decision making receiving or

    rejecting special orders to increase corporate profts. European Journa of Business and

    Innovation Research V8(3).

    Principles of Accounting, Volume 2, Managerial Accounting. (n.d). Retrieved from

    https://opentextbc.ca/principlesofaccountingV2openstax/chapter/evaluate-and

    determine-whether-to-keep-or-discontinue-a-segment-or-product/
    Walther, L. M., & Skousen, C. J. (2009). Managerial and cost accounting. Retrieved 02 10,

    2022, from

    https://library.ku.ac.ke/wp-coontent/downloads/2011/08/Bookboon/Acoounting/

    managerial-cost-accounting.pdf

    Zoger, K., & Zoger , L. (2006). The role of financial information in decision making process.

    Innovative Marketing.

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