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    Lecture 5 - Marginal Costing Differential Cost Analysis

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    prapulla suresh
    Differential cost analysis is a technique used to prepare ad-hoc information that only considers the cost and income differences between alternative courses of action. Differential costs are the changes in total costs that result from changes in production levels, methods, or mixes. They include both variable and fixed costs affected by the alternative. Differential costs are often confused with marginal costs because both consider the fixed and variable nature of costs, but they differ in that marginal costs apply per unit while differential costs apply to a fixed quantity, and differential costs can include fixed costs while marginal costs do not. Differential cost analysis is useful for decisions like accepting additional orders, export orders, new products, or territories when the incremental revenue exceeds the incremental or differential costs.

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    Lecture 5 - Marginal Costing Differential Cost Analysis

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    prapulla suresh
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    Differential cost analysis is a technique used to prepare ad-hoc information that only considers the cost and income differences between alternative courses of action. Differential costs are the changes in total costs that result from changes in production levels, methods, or mixes. They include both variable and fixed costs affected by the alternative. Differential costs are often confused with marginal costs because both consider the fixed and variable nature of costs, but they differ in that marginal costs apply per unit while differential costs apply to a fixed quantity, and differential costs can include fixed costs while marginal costs do not. Differential cost analysis is useful for decisions like accepting additional orders, export orders, new products, or territories when the incremental revenue exceeds the incremental or differential costs.

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    Marginal costing 5

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    Differential cost analysis is a technique used to prepare ad-hoc information that only considers the cost and income differences between alternative courses of action. Differential costs are the changes in total costs that result from changes in production levels, methods, or mixes. They include both variable and fixed costs affected by the alternative. Differential costs are often confused with marginal costs because both consider the fixed and variable nature of costs, but they differ in that marginal costs apply per unit while differential costs apply to a fixed quantity, and differential costs can include fixed costs while marginal costs do not. Differential cost analysis is useful for decisions like accepting additional orders, export orders, new products, or territories when the incremental revenue exceeds the incremental or differential costs.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    374 views2 pages

    Lecture 5 - Marginal Costing Differential Cost Analysis

    Uploaded by

    prapulla suresh
    Differential cost analysis is a technique used to prepare ad-hoc information that only considers the cost and income differences between alternative courses of action. Differential costs are the changes in total costs that result from changes in production levels, methods, or mixes. They include both variable and fixed costs affected by the alternative. Differential costs are often confused with marginal costs because both consider the fixed and variable nature of costs, but they differ in that marginal costs apply per unit while differential costs apply to a fixed quantity, and differential costs can include fixed costs while marginal costs do not. Differential cost analysis is useful for decisions like accepting additional orders, export orders, new products, or territories when the incremental revenue exceeds the incremental or differential costs.

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    Lecture 5 –Marginal costing Differential Cost Analysis

    Reference :Ravi M Kishore –cost Accounting

    Differential costing is defined as a technique used in the preparation of ad-hoc information in


    which only costs and income differences between alternative courses of action are taken into
    consideration. (CIMA Terminology). Costs may increase or decrease due to change in
    production, sale, production method, production-mix, etc. This change in total cost at a particular
    level of activity compared to another one is called differential costs, which are obtained by
    subtracting costs at one level from those at a higher level. Differential cost calculation includes
    both variable as well as fixed costs which are affected by the alternative course of action.
    Thus, the information can be presented by absorption costing of marginal costing techniques.
    Difference with marginal costing.

    In fact, differential costs are often confused with marginal costs,. This is because of the fact that
    both marginal costing and differential cost analysis stem from the basic behaviour of cost,i.e.
    fixed and variable. When fixed cost remain unaffected, both marginal costs and differential;
    costs are the same. However, they are not the same. The differences are as follows :

    (a) Marginal cost is an unit concept and applies to output per unit basis. Differential cost isa total
    concept and applies to a fixed additional quantity of output.

    (b) Marginal costing is presented by showing contribution per unit and fixed cost as a total
    amount. Differential costs are presented in totals in both formats – i.e. under marginalcost as well
    as absorption cost techniques.

    (c) Product cost under differential cost analysis may contain fixed costs, which will not be
    so under marginal costing.

    Use of Differential Cost Analysis


    Differential cost analysis may be a useful technique in taking appropriate policy decisions,
    Such as,—
    (i) Acceptance of an additional order at lower than existing price to a special customer,
    (ii) Acceptance of an export order, requiring additional outlay,
    (iii) Introduction of a new product,
    (iv) Opening of a new sales territory or channel of distribution,
    (v) Processing of a by-product or a joint product beyond the split-off point
    In all such cases, the differential cost is compared with incremental revenue. As long as
    incremental revenue is more than or equals to incremental or differential cost, the additional
    activity is justified. However, if differential cost exceeds incremental revenue, the project should
    be abandoned.

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