Business
Incremental Decision Making
Incremental decision making is a process of making decisions by breaking down a larger problem into smaller, more manageable parts. This approach allows for decisions to be made in smaller steps, reducing the risk of making a wrong decision and allowing for adjustments to be made along the way. It is often used in business to make complex decisions more manageable.
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5 Key excerpts on "Incremental Decision Making"
eBook - PDFManagerial Accounting
Tools for Business Decision Making
- Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso(Authors)
- 2017(Publication Date)
- Wiley(Publisher)
Video Decision-Making and Incremental Analysis 7-3 Decision-Making and Incremental Analysis LEARNING OBJECTIVE 1 Describe management’s decision-making process and incremental analysis. Making decisions is an important management function. Management’s decision-making process does not always follow a set pattern because decisions vary significantly in their scope, urgency, and importance. It is possible, though, to identify some steps that are frequently involved in the process. These steps are shown in Illustration 7.1 . Accounting’s contribution to the decision-making process occurs primarily in Steps 2 and 4—evaluating possible courses of action and reviewing results. In Step 2, for each possible course of action, relevant revenue and cost data are provided. These show the expected overall effect on net income. In Step 4, internal reports are prepared that review the actual impact of the decision. In making business decisions, management ordinarily considers both financial and non-financial information. Financial information is related to revenues and costs and their effect on the company’s overall profitability. Nonfinancial information relates to such factors as the effect of the decision on employee turnover, the environment, or the overall image of the company in the community. (These are considerations that we touched on in our Chapter 1 discussion of corporate social responsibility.) Although nonfinancial information can be as important as finan-cial information, we will focus primarily on financial information that is relevant to the decision. Incremental Analysis Approach Decisions involve a choice among alternative courses of action. Suppose you face the personal financial decision of whether to purchase or lease a car. The financial data relate to the cost of leasing versus the cost of purchasing. For example, leasing involves periodic lease payments; purchasing requires “up-front” payment of the purchase price.
eBook - PDF- Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso(Authors)
- 2018(Publication Date)
- Wiley(Publisher)
Video Decision-Making and Incremental Analysis 23-3 Decision-Making and Incremental Analysis LEARNING OBJECTIVE 1 Describe management’s decision-making process and incremental analysis. Making decisions is an important management function. Management’s decision-making process does not always follow a set pattern because decisions vary significantly in their scope, urgency, and importance. It is possible, though, to identify some steps that are frequently involved in the process. These steps are shown in Illustration 23.1. Accounting’s contribution to the decision-making process occurs primarily in Steps 2 and 4—evaluating possible courses of action and reviewing results. In Step 2, for each possible course of action, relevant revenue and cost data are provided. These show the expected overall effect on net income. In Step 4, internal reports are prepared that review the actual impact of the decision. In making business decisions, management ordinarily considers both financial and non- financial information. Financial information is related to revenues and costs and their effect on the company’s overall profitability. Nonfinancial information relates to such factors as the effect of the decision on employee turnover, the environment, or the overall image of the company in the community. (These are considerations that we touched on in our Chapter 19 discussion of corporate social responsibility.) Although nonfinancial information can be as important as finan- cial information, we will focus primarily on financial information that is relevant to the decision. Incremental Analysis Approach Decisions involve a choice among alternative courses of action. Suppose you face the personal financial decision of whether to purchase or lease a car. The financial data relate to the cost of leasing versus the cost of purchasing. For example, leasing involves periodic lease payments; purchasing requires “up-front” payment of the purchase price.
eBook - ePubPublic Sector Strategy
Concepts, Cases and Tools
- Mark Crowder, Mohammad Roohanifar, Trevor A. Brown(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
Instead, they slowly evolve in a series of small incremental steps (Tarter and Hoy, 1998). The outcomes of each change are monitored, and further changes are made as a result, and the process continues until a suitable solution is found (Tarter and Hoy, 1998). McElhinney and Proctor (2005) suggest that this is a way of avoiding serious mistakes, although they argue that this approach means that decision-makers are unable to cope with problems presented by sudden or substantial paradigm shifts. This has been described as the “science of muddling through” (Lindblom, 1959: 79). It differs from the normative and bounded rationality models in a number of ways. For instance, setting objectives and generating alternatives are not separate (Tarter and Hoy, 1998). Furthermore, the direction is not fixed by the process; “in fact, the more complex the problem, the more likely that objectives will change as decisions evolve” (Tarter and Hoy, 1998: 215), whereas with both normative models and bounded rationality, alternatives are assessed sequentially in order (Simon, 1997). Indeed, incrementatlism can be seen as a “middle ground” lying between normative models and bounded rationality (Lindblom, 1959, 1977). Incrementalism has been researched in a number of contexts including strategic planning (Quinn, 1978), politics and governance (Lindblom, 1977), health care technology (Claxton et al., 2011), marketing (Wierenga, 2011), and crowd behaviour (Kameda et al., 2011). Naturalistic Decision-Making (NDM) There are many situations that occur in natural settings that are difficult to replicate artificially, such as stressful conditions, high stakes, danger, and varying levels of experience, and normative theories do not adequately explain how decisions are made under these circumstances (Klein, 2008)
eBook - PDFManagerial Accounting
Tools for Business Decision-Making
- Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly(Authors)
- 2018(Publication Date)
- Wiley(Publisher)
It’s allowed Cisco to spread decision-making responsibilities across the organization, to working groups of some 500 executives. “Quicker decision-making at lower levels Laura Rauch/AP Images 278 CHAPTER 7 Incremental Analysis Incremental Analysis Approach Decisions involve a choice among alternative courses of action. Suppose that you were deciding whether to buy or lease a car. The financial data would be the cost of leasing versus the cost of purchasing. For example, leasing would involve periodic lease payments; purchas- ing would require upfront payment of the purchase price. In other words, the financial data that are relevant to the decision relate to the expense that would vary in the future among the possible alternatives. The process used to identify the financial expenses that change under alternative courses of action is called incremental analysis (see Alternative Terminology). In some cases, you will find that when you use incremental analysis, both costs and revenues will vary. In other cases, only costs or revenues will vary. Just as your decision to buy or lease a car will affect your future, similar decisions on a larger scale will affect a company’s future. The incremental analysis identifies the probable effects of those decisions on future earnings. This type of analysis always involves estimates and uncertainty. Data for incremental analyses may be gathered from market analysts, engi- neers, and accountants. In quantifying the data, the accountant is expected to produce the most reliable information available at the time the decision must be made. How Incremental Analysis Works Illustration 7.2 shows an example of the basic approach in incremental analysis. ALTERNATIVE TERMINOLOGY Incremental analysis is also called differential analysis because the analysis focuses on differences. 1 Although income taxes are sometimes important in incremental analysis, they are ignored in this chapter in order to keep things simple.
eBook - PDFAccounting
Tools for Business Decision Making
- Paul D. Kimmel, Jerry J. Weygandt, Jill E. Mitchell(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
20-20 CHAPTER 20 Incremental Analysis Review and Practice Learning Objectives Review 1 Describe management’s decision-making process and incremental analysis. Management’s decision-making process consists of (a) identifying the problem and assigning responsibility for the decision, (b) determining and evaluating possible courses of action, (c) making the decision, and (d) reviewing the results of the decision. Incremental analy- sis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they vary across the possible alternatives. 2 Analyze the relevant costs in accepting an order at a special price. The relevant costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the differ- ence between the variable manufacturing costs to produce the special order and expected revenues. Any changes in fixed costs, opportunity cost, or other incremental costs or savings (such as additional shipping) should be considered. 3 Analyze the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity cost. 4 Analyze the relevant costs and revenues in determin- ing whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 5 Analyze the relevant costs to be considered in repair- ing, retaining, or replacing equipment. The relevant costs to be considered in determining whether equip- ment should be repaired, retained, or replaced are the effects on vari- able costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered.
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