The most important task in any business is that of decision making, which can either make or ruin the business. To ease this, various approaches are used in decision making. These include marginal analysis and incremental analysis. Although they work hand in hand, they have various differences.
What is Marginal analysis?
This is an analysis of additional benefits based on an activity in comparison to additional costs incurred by the same activity. Marginal basically refers to the cost or benefit of producing one more product or profit gained by adding one more worker. This is commonly used by companies trying to maximize the profits by determining the effect of minor changes to the whole business. It also helps in making a decision between two or more investment options especially where funds are limited.
What is Incremental analysis?
This is a technique used in the determination of the true cost among alternatives in a business. It is mainly important in short term businesses whereby major focus is put only in opportunity costs and other relevant costs. This approach disregards any past costs and sunk costs. Decisions such as whether to rebuild an asset, buy or produce goods and scrap off a project off relies on incremental analysis reports.
Similarities between Marginal Analysis and Incremental Analysis
- Both are important in decision making in a business
- Both are aspects of economic decisions such as revenue, utility and cost
Differences between Marginal Analysis and Incremental Analysis
Definition
Marginal analysis is an analysis of additional benefits based on an activity in comparison to additional costs incurred by the same activity. On the other hand, incremental analysis is a technique used to determine the true cost among alternatives in a business.
Costs involved
While marginal analysis involves revenues and variable costs, incremental analysis involves relevant costs as well as opportunity costs.
Uses
Marginal analysis helps in making a decision between two or more investment options especially where funds are limited. On the other hand, incremental analysis is used in decision making such as whether to rebuild an asset, buy or produce goods and scrap off a project off relies on incremental analysis reports.
Marginal Analysis vs. Incremental Analysis: Comparison Table
Summary of Marginal Analysis vs. Incremental Analysis
While both marginal analysis and incremental analysis are important in decision making in a business, marginal analysis is an analysis of additional benefits based on an activity in comparison to additional costs incurred by the same activity especially where funds are limited while incremental analysis is a technique used to determine the true cost among alternatives in a business.