Managerial accounting aids in cost analysis, planning, control, and decision-making for well-run businesses, and the best type of accounting to rely on is incremental analysis. It is the comparison of the difference in revenue, costs, profits, or losses between alternatives. Thus, the data required for comparison may vary depending on the type of choice being made.
The preferred alternative is the one that yields more incremental profit. This translates to more incremental revenue and less incremental costs (Jiambalvo, 2019). Generally, managerial accounting also depends on the performance measurement criteria that the manager chooses to focus on. Therefore, concentrating on the three ideas of increasing the scheduled production of D45 valves by 100 units, additional of another schedule production line, and dropping the product may need the input of different types of costs in order to know whether there is any meaningful profit to be made in each case scenario. When increasing the scheduled production by 100 more units or scheduling an additional production line, the variable costs of producing the additional goods are considered, and the profits per sale of each unit are calculated. In this scenario, the additional units will lead to additional sales hence translate to more profitability provided the variable costs can be justified for each number of increased units. If the business breaks even for the production of valves upon reaching a certain number, then the 100 units may not be enough to warrant the expenditure of more resources.
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On the other hand, both fixed and variable costs should be analyzed when choosing to drop a product. It is crucial to identify the relevant costs and measure them in order for this accounting tool to work (Habib, 2020). This is because the product may not be making profits on its own but goes ahead to contribute to the fixed costs used to run other business segments. Only when the variable costs of producing the product are more than its total income that dropping it becomes an easy decision. Thus, Boswell needs to review the impact of the sales of the D45 valves on its wider operational costs before choosing whether to drop the product.
References
Jiambalvo, J. (2019). Managerial accounting (7th ed.). John Wiley & Sons.
Habib, Ahmed. (2020). Incremental Analysis and Decision-making. In Habib, A. (2020). Management Accounting for Business Decisions . https://www.researchgate.net/publication/344131982_Incremental_Analysis_and_Decision-making
