Managerial Accounting: Performance Evaluation and Differential Analysis and Product Pricing - Assignment Example

There are two vital rates of return concepts. The Economic rate of return and the Accounting rate of return. Both of these rates of returns play a vital role in terms of an investment appraisal .now, to measure the economic performance of investment; we need to be aware of its Real rate of return of the finished project. Herein all Cash receipts are expressed in terms of monetary units which hold equal purchasing power. This theory is what provides the base to the following value of future performance.

The present value of the expected cash flow of the project discounted appropriately.A differential analysis is considered an alternative to the traditional income statement format. Pricing decisions are made using the differential analysis methodology. If organizations apply differential analysis to pricing, then every price given for a product is considered as the alternative course of action. The fixed costs, however, will remain the same in between. The aims of all organizations in the process of selecting an appropriate price is where total future revenues will exceed total future costs.

The Differential analysis is done at various levels to assess, product pricing, project viability, etc. All costs cannot be considered to be a part. Decision making only includes future revenue. These future revenues tend to also differ. Management does not possess the capability of altering all of its past decisions. But on the other hand, it is capable of changing its future decisions, by setting up its future costs with care. Differential costs are also known, and often times referred to as or incremental costs.

It is also comprehended as the difference in the total cost which occurs due to a change in Price. It is considered as the increase or the decrease in total cost. It is calculated mathematically, by subtracting the cost of one alternative from the cost of another alternative.