MANAGERIAL
ACCOUNTING
Differential Analysis
Differential analysis is the process of comparing the future costs and
benefits between two or more alternatives in decision making. Its primary
focus is on the differences or changes that would occur if one alternative
were chosen over another.
Why is it called the Key to Decision Making?
When we do differential analysis, we will compare the costs and benefits
of several alternatives and then see the differences or changes that will
occur if one alternative is chosen over another. That way, we can see
which option is more suitable for us to use and can be more profitable for
the company.
Defining Alternatives
The first step in decision making is to
determine the alternatives. In this case, only
the future costs/benefits differ between the
alternatives being analyzed.
Key Concepts in
Decision Making
Distinguishing between relevant and
irrelevant costs and benefits
The second step in decision making is to
consider relevant costs and benefits and
ignore irrelevant costs and benefits.
Relevant Costs and Benefits
Relevant Costs are future costs that are expected to differ or be affected by
the decision taken, and are different for each decision alternative.
Relevant Benefits are benefits that will be obtained from a particular choice
and are different from the benefits obtained from other choices.
Differential Differential Opportunity
Cost income Cost
Incremental cost
Additional costs that occur due to changes in
activities or certain alternative actions
Example: If a company decides to increase production
from 1000 units to 1500 units, the additional cost to
Differential Cost produce each additional unit is an incremental cost
Future costs that
differ between two
alternatives Avoidable cost
Costs that would not occur if a particular activity
or decision were not made
Example: If a company decides not to accept a special
order, the costs associated with producing that order
(e.g., raw materials, direct labor) can be avoided
Differential Income
Difference in income between two or more decision
alternatives
Example: if product A generates income of $10,000 and
product B generates income of $8,000, the differential
income is the difference between the two incomes,
which is $2,000.
Opportunity Cost
Value or benefit lost due to choosing one option
from several available options
Example: If we choose to buy a car, the
opportunity cost is money that could be used for
other things, such as investment or vacation.
Irrelevant Costs and Benefits
Costs and benefits that will not change or differ among the
various options available
Why Are Irrelevant Costs and Benefits Ignored?
1. These costs and benefits will not affect the final outcome
of the decision made.
2. Ignoring irrelevant data saves decision makers a lot of
time and effort.
3. Incorrectly including irrelevant costs and benefits when
analyzing alternatives can lead to poor decisions.
Sunk cost
Costs that have been incurred and cannot be refunded, regardless of
decisions that will be taken in the future
Example: A company bought a machine worth Rp 300 million 2 years ago. Now, there is
an offer of a new machine worth Rp 250 million that is more efficient and saves
production costs. If the company decides to buy a new machine, then the old machine
will become a sunk cost because the cost cannot be recovered and must be ignored.
Future costs and benefits do not differ between alternatives
Example: The use of factory overhead costs that may be the same in each production
alternative. These costs are irrelevant because they will be incurred regardless of which
product is produced.
Business Segments and Sourcing
Adding
Dropping
Differential Analysis is conducted to determine a business line is being added or thrown away. Manager
will look after financial advantages & disadvantages before deciding.
Many considerations are taken into account such as Avoidable Fixed Expense and Unavoidable Fixed
Expense. While variable expense is directly vanish after removing the segment.
Sunk Cost
Future Cost
Another consideration is Sunk Cost and Future Cost, company need to consider both of this cost before
making decision.
Discount Drug Company
Sourcing Decision
Development
Assembling
After Sales Services
Processing material to become valuable is called Value Chain. in real world value chain consist of many steps that
will execute by the company.
A decision to carry out one of the activity in the value chain by the company either internally or externally is called
a Sourcing Decision. Sourcing decision is way more complicated. Strategic aspect appears in the management
decision rather to buy or make. buy might offer lower cost and in good quality, however, supplier company will
have competitive advantage in the market. make could offer in specialized and better quality, but can lead to
cost overruns.
Opportunity cost, the loss of potential gain from other alternatives when one alternative is chosen.
Special Order Analysis
When a company receives a special order—typically a one-time order for a large quantity at a price lower
than usual—it must decide whether accepting it would be beneficial. This decision is made through
incremental (differential) analysis, focusing only on additional revenues and costs that would result from
the order.
Key points:
Only relevant costs and revenues (those that change) are considered.
Sunk costs and fixed overheads that do not change should be ignored.
Accept the order if the incremental revenue exceeds the incremental cost.
Example: Seattle Police Department Bike Order
SportLife Cycle normally sells bikes for $300 each, with a variable cost of $200. The Seattle Police
Department offers to buy 100 bikes at $250 each.
Incremental revenue = $250 per bike
Incremental cost = $200 per bike
Profit per bike = $50 × 100 bikes = $5,000 extra profit
Conclusion: Accepting the order is profitable, as long as it doesn’t interfere with regular sales.
Volume trade-off decisions under capacity constraints
Volume trade-off decisions under capacity constraints refer to choosing which products or services to
produce—and in what quantities—when a company faces limited resources (such as machine hours,
labor hours, or materials). Since not all demand can be met, the goal is to maximize total profit by
making the best use of the constrained resource.
What is the Constraints?
A constraint is anything that prevents you from getting more of what you want.
The constraint, or bottleneck, in the system is determined by the step that limits total output because
it has the smallest capacity.
Contribution Margin per unit of constrained resource
Contribution Margin per unit of constrained resource is a financial metric used to determine which
product or service yields the highest profit relative to a limited resource—such as machine hours, labor
hours, or materials.
It helps businesses decide which products to prioritize when they can't produce everything due to
capacity limitations.
Techniques to Manage and Relax Constraints
When a company is faced with resource constraints such as machinery, labor time, or raw materials,
techniques used to increase the efficiency of using these limited resources include:
Identify and Focus on the Constraint.
Improve the Efficiency of the Constraint.
Outsource Non-Bottleneck Activities.
Invest to Increase Capacity.
Change the Product Mix.
Joint Cost Concept Split-Off Point Concept
Are the costs incurred in The point in the production
the joint production process where joint products
process before the split- become separate and
off point individually identifiable
Example
In the wool processing industry, the wool is processed into several
products such as cloth, yarn, and raw wool. The costs before the
separation of these products (such as shearing and washing) are joint
costs.
Sell or process further decisions
Is a managerial decision taken to determine whether a joint product Will be
sold immediately after reaching the split-off point, or Will be further
processed so that it can be sold at a higher price.
The Purpose
To choose the alternative that produces the highest profit (benefit), by
considering:
1. Additional revenue from sales after further processing
2. Additional costs required for further processing.
Incremental analysis for further processing
Method used to determine the actual cost and revenue
differences between two processing alternatives
Profitability evaluation across joint products
the process of assessing the profitability of each joint
product produced from one production process or the same
raw material.
Journal Studies
Modern Technology’s role in accounting cost
calculation of industrial enterprises: Informatization as
a key strategy to improve management efficiency
Background
Modern industrial companies face various serious challenges,
especially in terms of cost accounting.
Auditors face challenges in assessing the fairness of financial
accounts that are complex and influenced by many variables.
Traditional audit methods, such as substantive testing and
ratio analysis, are often inadequate to detect hidden deviations
or anomalies in financial data.
Challenges of Traditional Cost Accounting
Disparate data sources and lack of
integration, which makes it difficult to
obtain complete cost information. Companies need
Manual processes are prone to accurate and up-to-
errors and omissions, thus reducing date cost data to
the accuracy of cost calculation improve responsive
results. and strategic
decision-making.
Lack of real-time updates, resulting
in delays in managerial decision
making and inability to adapt to
market dynamics.
Challenges of Motivation for using modern
Traditional technologies (MILP, data
Cost mining, big data, AI, activity-
Accounting based costing)
Research Gaps
Previous research has focused on only
one technology.
There is no integrated and real-time
modeling framework yet.
Problem Statement
How to build a real-time cost
control model based on
modern technologies (MILP, AI,
Research
data mining, and ABC) to
Gaps
improve the efficiency and
accuracy of decision making in
industrial companies?
Research Method
Mixed Integer Linear Programming
MILP is a mathematical modeling and solving method. Its used widely in production automization task. the result
are expected to reflect the limitation of the manufacturing such as budget constraints, time constraints and so
forth.
Data Mining and Big Data analysis
Data Mining is process of discovering data from large dataset. while Big Data is also examining the dataset but
with extremely larger sources (Big Data). Data Mining could be used by the Big Data analysis in larger and
complex scale.
Notes: Machine Learning & Neural Networks Algorithms
Application of AI in production scheduling and resource optimization
generative AI is helpful tools for production scheduling. Even more, Deep Learning can predict the demand in the
production process then arranging with the production schedule.
Construction of cost control model
A cost control model in construction uses big data and data mining to predict and manage expenses. By
analyzing data like labor, materials, and equipment use, it identifies risks of budget overruns. The model supports
real-time monitoring and improves over time to aid decision-making and cost efficiency.
Data Sources and Experimental Validation
This research uses data from multiple reliable sources to ensure the accuracy and comprehensiveness of
the data. The primary data are obtained from:
Manufacturing industry: China National Statistics website ([Link]
Electronics industry: China Information Industry Development Research Institute
([Link]
Automotive industry: Global automobile manufacturers data (Kaggle)
Consumer goods industry: Sales data from Amazon, Alibaba, and eBay (Kaggle)
Data types used include: process data (e.g. production volume, downtime, product defects), cost records
(direct/indirect costs), resource usage (energy, water, raw materials), and market demand data (trends
and prices).
Data period: January 1, 2019 to December 31, 2023, covering a wide range of economic conditions.
Data cleaning and normalization processes
Delete duplicate and missing data. Normalization
Correcting obviously wrong data. Normalization is an important process in data analytics that
Standardization. aims to change data values into an appropriate format or
Screening of COVID-19 data. range, while preserving the “structure” or “pattern” of the
Abnormal values & noise data original data, so that they can be compared, analyzed, or
processed more efficiently and accurately.
Cost accounting measurement indices.
1. Accuracy Index (CACC)
This measures how accurately the enterprise calculates costs using the new system. It is calculated as:
NCCA: Number of cost components correctly calculated after adopting the new system
TNCA: Total number of cost accounting activities performed
2. Cost Control Efficiency (CCE)
This measures how much more efficiently the company controls costs after implementing the system:
CCCASU: Cost control capability after the system upgrade
CCCBSU: Cost control capability before the upgrade
3. Overall Management Efficiency (OME)
This measures the broader impact of cost systems on enterprise management:
MESU: Management efficiency after adopting the new system
MEBSU: Management efficiency before adoption
Example of experimental data.
Result
Real Time Control Model can :
[Link] cost accounting accuracy by 26.74%
[Link] management efficiency by 13.60%
[Link] cost control efficiency by 17.42%
By using this model the SMEs And also the model remains
(small and medium robust when tested under
enterprises) feel the impact uncertain conditions (e.g. raw
more than large company material price fluctuations or
because they are more a pandemic)
sensitive to cost changes
