How to Analyze Costs & Benefits in Financial Reporting Problems
- 1). Identify the problem. Ask the manager what decision she needs to make. Write down the alternative actions she is contemplating on individual sheets of paper.
- 2). Take one sheet of paper. Write down each financial benefit the company would enjoy if that action were chosen. These include revenue increases or cost reductions.
- 3). Write down each cost the company would incur if that action were chosen. These include increased professional fees or additional labor expense.
- 4). Subtract the costs from the benefits. This calculates the net benefit of that action.
- 5). Repeat steps 2 through 4 for each alternative action.
- 6). Compare the net benefit from each action. Choose the action with the highest net benefit.