{"id":607,"date":"2018-04-18T23:14:25","date_gmt":"2018-04-18T23:14:25","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=607"},"modified":"2024-04-29T17:33:58","modified_gmt":"2024-04-29T17:33:58","slug":"differential-analysis-process","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/differential-analysis-process\/","title":{"raw":"Differential Analysis","rendered":"Differential Analysis"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Explain the process of differential analysis<\/li>\r\n<\/ul>\r\n<\/div>\r\nRemember back to Module 11: Relevant Revenues and Costs where we discussed relevant and irrelevant costs and defined differential costs. We went into some discussion of differential analysis, but let\u2019s take a closer look.\r\n\r\nDifferential cost is defined as the difference in cost between any two alternative choices, so differential analysis will look at <strong>all possible<\/strong> scenarios to make a decision!\r\n\r\nDifferential analysis involves looking at all possible scenarios of a decision, but ignoring some costs that are not relevant to the decision itself. We started talking in Module 11: Relevant Revenues and Costs, about costs that should not play in to the choices we need to make. We, as managers, simply need to focus on the costs and revenues that <strong>differ<\/strong> between the two choices.\r\n\r\nSo, reviewing some key terms in the process is important:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\"><strong>Differential cost (relevant cost):<\/strong> the difference in cost between two choices.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Differential revenue (relevant benefits):<\/strong> the difference in revenue between two choices<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Sunk cost:<\/strong> a cost that has already been incurred, so won\u2019t be avoided no matter what decision is made.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Avoidable cost:<\/strong> a cost that CAN be eliminated depending on the decision made.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Opportunity cost:<\/strong> the potential benefit that is given up if an alternative decision is made.<\/li>\r\n<\/ol>\r\nSo we need to ignore those things that remain constant, regardless of the decision we make. An example could be the rent paid on the building. It won\u2019t matter whether you are making widget A, B or C, you still have to pay for the building, right? So rent would <strong>not<\/strong> be relevant to the decision regarding which product to make or sell.\r\n\r\nAs managers, we need to look at all of the costs, and then determine which ones matter for the decision we are making. The relevant costs can differ for different decisions, so it is important to look at all of the costs involved, and look at each one independently for each decision!\r\n\r\nWe will look at a variety of decisions in this module to help you practice your differential analysis skills!\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/e71cb90c-cafd-4c24-af3c-73b727044236\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain the process of differential analysis<\/li>\n<\/ul>\n<\/div>\n<p>Remember back to Module 11: Relevant Revenues and Costs where we discussed relevant and irrelevant costs and defined differential costs. We went into some discussion of differential analysis, but let\u2019s take a closer look.<\/p>\n<p>Differential cost is defined as the difference in cost between any two alternative choices, so differential analysis will look at <strong>all possible<\/strong> scenarios to make a decision!<\/p>\n<p>Differential analysis involves looking at all possible scenarios of a decision, but ignoring some costs that are not relevant to the decision itself. We started talking in Module 11: Relevant Revenues and Costs, about costs that should not play in to the choices we need to make. We, as managers, simply need to focus on the costs and revenues that <strong>differ<\/strong> between the two choices.<\/p>\n<p>So, reviewing some key terms in the process is important:<\/p>\n<ol>\n<li style=\"font-weight: 400;\"><strong>Differential cost (relevant cost):<\/strong> the difference in cost between two choices.<\/li>\n<li style=\"font-weight: 400;\"><strong>Differential revenue (relevant benefits):<\/strong> the difference in revenue between two choices<\/li>\n<li style=\"font-weight: 400;\"><strong>Sunk cost:<\/strong> a cost that has already been incurred, so won\u2019t be avoided no matter what decision is made.<\/li>\n<li style=\"font-weight: 400;\"><strong>Avoidable cost:<\/strong> a cost that CAN be eliminated depending on the decision made.<\/li>\n<li style=\"font-weight: 400;\"><strong>Opportunity cost:<\/strong> the potential benefit that is given up if an alternative decision is made.<\/li>\n<\/ol>\n<p>So we need to ignore those things that remain constant, regardless of the decision we make. An example could be the rent paid on the building. It won\u2019t matter whether you are making widget A, B or C, you still have to pay for the building, right? So rent would <strong>not<\/strong> be relevant to the decision regarding which product to make or sell.<\/p>\n<p>As managers, we need to look at all of the costs, and then determine which ones matter for the decision we are making. The relevant costs can differ for different decisions, so it is important to look at all of the costs involved, and look at each one independently for each decision!<\/p>\n<p>We will look at a variety of decisions in this module to help you practice your differential analysis skills!<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_e71cb90c-cafd-4c24-af3c-73b727044236\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/e71cb90c-cafd-4c24-af3c-73b727044236?iframe_resize_id=assessment_practice_id_e71cb90c-cafd-4c24-af3c-73b727044236\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-607\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Differential Analysis. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":3,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Differential Analysis\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"afa36f57-bcaa-4123-b2b1-0e667e41730e, 5f25cbf9-9817-4438-831d-6383cfce50dc","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-607","chapter","type-chapter","status-publish","hentry"],"part":111,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/607","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":10,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/607\/revisions"}],"predecessor-version":[{"id":4149,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/607\/revisions\/4149"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/111"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/607\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=607"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=607"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=607"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=607"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}