Gap Analysis

  

Categories: Accounting, Banking

The New Year is right around the corner, and you are making resolutions to work out more, read more, save more money, spend more time with friends, etc. You analyze the current state of your life and finances, and see a gap somewhere between where you are and where you want to be. So you come up with a resolution and steps to meet your goal within the next year.

This analysis enables you to see where the gaps are in your life, and find solutions to fill those gaps.

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Cost Accounting: What Is Differential An...2 Views

00:00

And finance Allah shmoop What is differential analysis All right

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people Well it's a cost accounting term that asks How

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could we do our business differently and better Different version

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of you know doing our bidness Okay so you work

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in the accounting department of Whisper Whisker the leading provider

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of beard hair implants for chin bald millennial men Your

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boss comes to you with a project Currently you use

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one bad hormone therapy for one of your more popular

00:31

procedures because as whisper whiskers states in its brochures the

00:35

wombats lustrous hair gives your new beard the inviting pen

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ability Your special someone will love However one bats are

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on the endangered species list minor detail and lately whisper

00:46

whisker has been getting a lot of bad PR from

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the pro wombat lobby So your boss wants to make

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us switch well there are two options On one hand

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you're a boss says that the purchasing department can get

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a deal on Angora rabbit glands But on the other

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hand the RND department says musk ox glands worked much

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better for the hormone therapy you provide He wants to

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let you figure out which option costs less on a

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per procedure basis Assuming everything else is equal well to

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figure it out you're going to use differential analysis Basically

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you look at the various potential solutions and see which

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one makes the most sense You run the numbers A

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musk ox Eagle Land provides enough hormone for seventeen therapy

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sessions However they're hard to farm in The special humane

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extraction technique is expensive Each gland cost you a grand

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for angora as well It's much cheaper They're smaller and

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easier to handle Therefore each rabbit gland only cost two

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hundred fifty dollars However you get less hormone from each

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gland in the hormone is less potent so each angora

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gland is only good enough for four therapy sessions So

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you're spending two hundred fifty bucks for for therapy sessions

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with the Angora and you're spending a grand for seventeen

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sessions for the musk ox Well it's Keone differential analysis

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to get rid of as much noise as possible so

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you reduce the calculations here too The one unit scenario

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like compare apples to apples in this guy Jason glands

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to glance for this analysis well you're keeping all cost

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the same it once the hormone is acquired The procedure

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is the same whether musk ox or in glands or

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you for the rabbit gland The hormone cost for the

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procedure will run sixty to fifty each time There's the

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math for musk ox while the cost is about fifty

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eight eighty to everything else remaining equal Well you'll be

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better off better profit margins that is going with the

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musk ox because it's chief for well the price for

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the animal glands is called the differential cost It's the

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cost that will change as part of the change that's

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being made right It's differentiating the analysis here Meanwhile large

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number of other cost stay the same The doctor to

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perform the hormone insertion the facility where the therapy takes

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place the insurance the advertising and so on None of

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these costs get impacted by the switch in the source

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of the hormone So you let your boss know and

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he gets the wheels in motion It's set up the

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musk ox farms at least until the musk ox lobby

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gets wind of it Oh those musk ox people are

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such a pain differential analysis will also let you know

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when something doesn't matter like you use a special dye

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in some of your premium procedures It makes the beards

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whatever color a person wants They can match their you

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know natural hair color or go wild Rainbow Wild is

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popular feature these days Fire orange however is the most

03:13

popular color You also offer a tight teal that's well

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not so popular We'll fire orange outsells type deal by

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a three to one ratio The problem Fire orange is

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significantly more expensive like five times more Should you discontinue

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fire orange and have sales people pushed the cheaper tight

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Teel Well probably no not really The customer wants With

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customer wants right a therapy session is worth five hundred

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dollars in revenue The tight he'll die needed for a

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session costs a dollar fire Orange costs five dollars Yes

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it's five times more but it's nearly negligible on a

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relative basis like as a total of the five hundred

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dollars in revenue you get It's almost a rounding error

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if discontinuing fire orange drop sales even a percent while

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the move will end up hurting profit in the long

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run The gland switch situation was a pretty simple example

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but differential analysis It can get complicated quickly Take this

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seemingly straightforward scenario You make a line of branded beard

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maintenance products combs and decorative ties You make them in

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America with union labor The cost to whisper whiskers all

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in is about thirty seven dollars an hour for the

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union labor you face competition from China Their products are

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about ninety percent as good as yours but they're half

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the price Is there a way to be able to

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make your product such that you could drop prices by

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a third even and still be competitive Alright while the

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differential analysis here can you train a foreign labor force

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to do about same job is your union workers do

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in Chicago and get them to do it for five

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bucks an hour And will there be tariffs or import

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duties and other frictions like shipping costs and shipping risk

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If you do go ahead and make the switch and

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you know make him in Mexico or China or the

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Philippines or somewhere and oh what about the fine print

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in those union contracts How long are you obligated to

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keep your expensive union US force Like maybe you have

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two years of payroll that you have to get through

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so maybe it's not worth is too expensive to switch

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Differential analysis divides itself naturally into short term and long

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term decisions as well Kind of like a balance sheet

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like a short term analysis might revolve around discounting last

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year's model of beard ty to clear them off the

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shelves and make room for this year's models which now

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boast a delicious cappuccino sent will long term Well what

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if we used robots to make the combs and beard

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ties instead of bothering with a human workforce at all

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No robot union right The cap ax to build those

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robots is a long term decision like you don't just

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make him configure him And in four months get your

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money back Well same deal with big distribution decisions like

05:35

partnering with Walmart or trying to enter the lucrative Russian

05:38

millennial market or China or Somalia while getting into Somalia

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Isn't that hard It's you know getting out that compose

05:45

it challenge there What

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