4.1 Customer And Product Line Decisions Based On Differential Analysis

Differential analysis or incremental analysis is one of management accounting techniques by only examining the differences in profits, costs, and revenues resulting from decision of business rather than reporting the full statements of income for every alternative (Jan, 2019). This means in general, the types of financial data that might be excluded are the cash flow statements and balanced sheet’s Krakatau Steel Inc, since it is mentioned in the above definitions that the creation of income statements can be simplified by the above three terms for our differential analysis.     

To use differential analysis for decisional evaluation whether we need keeping or dropping customers based on the profits, specific costs and revenues need to be considered. For the purpose of our study, the specific costs which can be variable costs, direct fixed cost, and allocated fixed costs (Management, 2017) in relation to tracking information by real potential customers of Krakatau Steel’s Inc with unreal financial data can be presented by the analysis of the following table (Saylor, n.d.),

The above results mentioned that dropping the energy company's account as the customer of Krakatau steel is not recommended due to the final loss of profit. In fact, even though the energy company’s contribution to the Krakatau steel is giving the lost of -15000 usd, if we keep it becoming the valuable customer, aggregated profits  with all customers are better than those if the energy company is dropped.

The same way can be used to decide whether to keep or drop the product lines of Krakatau steel due to the existing competitors which result in profit or loss of the financial information (Dotorg, n.d.). This way we can just put the existing product lines based on the company profile of Krakatau steel Inc including Hot Rolled Coil (HRC), Cold Rolled Coil (CRC), and Wired Rod (WR) in place of the above three customer names with the same names of specific cost and revenues (Management, 2017)   

In addition, other important cost definitions in the discussions of differential analysis of every company are the sunk and opportunity costs. Sunk cost of Krakatau Steel Inc can be defined as the unrecovered cost that has already been spent by the company such as the heavy machineries and equipment which is hugely expensive. The sunk cost will remain constant regardless of the impact of the final decision. This is why the so called sunk cost is not considered in differential analysis (Tuovila, 2021). Another one is the opportunity cost which can be defined as the cost we need to pay or lost benefit (Anonimous, n.d.) as a result of choosing an alternative and neglecting the others. The examples of the cost were previously explained in choosing alternatives of decisions to keep or drop product lines and customer. As a matter of fact, this opportunity cost will be different in relation to different choices of available alternatives. This is the reason why opportunity cost is fully considered for differential analysis.   

 

References

Jan, O. (2019, March 31). Differential analysis. Differential (Incremental) Analysis in Accounting | Example. Retrieved September 27, 2021, from https://xplaind.com/478812/differential-analysis.

Management, K. R. A. S. (2017). Krakatau Steel's Company Profile. Cilegon; PT. Krakatau Steel.

Saylor. (n.d.). Customer Decisions. Customer decisions. Retrieved September 28, 2021, from https://saylordotorg.github.io/text_managerial-accounting/s11-04-customer-decisions.html.

Dotorg, S. (n.d.). Product line decisions. Retrieved September 28, 2021, from https://saylordotorg.github.io/text_managerial-accounting/s11-03-product-line-decisions.html#heisinger_1.0-ch07_s03_s02_f01.

Tuovila, A. (2021, September 19). Sunk cost. Investopedia. Retrieved September 28, 2021, from https://www.investopedia.com/terms/s/sunkcost.asp.

Anonimous. (n.d.). Opportunity Cost. Review of cost terms used in differential analysis. Retrieved September 28, 2021, from https://saylordotorg.github.io/text_managerial-accounting/s11-05-review-of-cost-terms-used-in-d.html.