Differential Analysis

Managerial Accounting

April 18, 2013

Differential Analysis

Chapter 12 in the Managerial Accounting book covers a few different topics but the majority of the chapter covers the topic of Differential Analysis. Differential analysis can be explained in lemans terms as a way to evaluate only the factors that are different or unique among possible alternatives. The four steps of differential analysis are to: 1) compute all costs associated with each alternative, 2) ignore the sunk costs, 3) ignore costs that remain largely constant among the alternatives, and 4) select the alternative offering the nest cost-to-benefit ratio. With these four steps, businesses across the board can weigh out the pros and cons of a given project.

A prime example of how differential analysis was used in the Cincinnati area was building the Paul Brown Stadium. The stadium broke ground on April 25, 1998 and was opened on August 19, 2000. During the building of the stadium, there was a budget of nearly $500 million dollars and they surpassed that in today’s dollars, which comes out to nearly $607 million dollars. With the price of this stadium, one owner would not suffice so the bill of the stadium was put on Hamilton County’s budget. With the current Bengal’s owner Mike Brown, there was a scenario brought about representing avoidable costs.

When the stadium was on the drawing boards, Mike Brown made statements basically saying that either the city of Cincinnati was going to come up with the funds for a new stadium or he was going to take his team to another city that would build a stadium for the team. The avoidable cost of either building the stadium and having to fund the massive project or telling Mike Brown to leave was a huge decision. The city of Cincinnati decided that the value of keeping the Bengals in Cincinnati was greater then having them leave, so the bill was passed through the Hamilton County Courts and the funds for the stadium were raised.

With the amount of money...