Incremental Analysis Decisions for Non-Accounting managers

Decision making is the process of making choices by identifying a decision, gathering information, and assessing alternative resolutions. Using a step-by-step decision-making process can help you make more deliberate, thoughtful decisions by organizing relevant information and defining alternatives.

What Is Incremental Analysis?

Incremental analysis is a decision-making technique used in business to determine the true cost difference between alternatives. Also called the relevant cost approach, marginal analysis, or differential analysis, incremental analysis disregards any sunk cost or past cost. Incremental analysis is useful for business strategy including the decision to self-produce or outsource a function.

Incremental Analysis Explained

Incremental analysis is a problem-solving approach that applies accounting information to decision making. Incremental analysis can identify the potential outcomes of one alternative compared to another.

Relevant Versus Non-Relevant Costs

Analysis models include only relevant costs, and these costs are typically broken into variable costs and fixed costs. Incremental analysis considers opportunity costs—the missed opportunity when choosing one alternative over another—to make sure the company pursues the most favorable option.

Non-relevant sunk costs are expenses already incurred. Because the sunk costs will remain regardless of any decision, these expenses are not included in incremental analysis. Relevant costs are also called incremental costs because they are only incurred when an activity of relevance has been increased or initiated.