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Differential revenues and costs (also called relevant revenues and costs or incremental revenues and costs) represent the difference in revenues and costs among alternative courses of action. Analyzing this difference is called differential analysis (or incremental analysis). Differential cost is the difference between the cost of two alternative decisions, or of a change in output levels. The concept is used when there are multiple possible options to pursue, and a choice must be made to select one option and drop the others. (v) EXECUTIVE PROGRAMME SYLLABUS FOR MODULE 1 - PAPER 2: COST AND MANAGEMENT ACCOUNTING ( Marks) Level of Knowledge: Working Knowledge Objective: To acquire knowledge and understanding of the concepts, techniques and practices of cost and management accounting and to develop skills for decision making. Chapter 2: Cost–Volume–Profit Relationships Chapter 3: Job–Order Costing: Calculating Unit Product Costs Chapter 4: Variable Costing and Segment Reporting: Tools for Management Chapter 5: Activity–Based Costing: A Tool to Aid Decision Making Chapter 6: Differential Analysis: The Key to Decision Making Chapter 7: Capital Budgeting Decisions.
Differential Costs or Incremental cost Differential costs assist decision makers while making a choice between different alternatives. Differential costs are those items of total costs of two or more alternatives which have different magnitude under each alternative. Items of differential costs may be variable cost items or fixed cost items. STRATEGIC COST MANAGEMENT - DECISION MAKING SYLLABUS - First Edition: August cost and management accounting and, in the process, created an awareness of current developments Marginal Costing- Differential costing-CVP Analysis – Profit Volume Graphs – Contribution Approach (b) Decisions involving alternative choices. determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making. Meaning and Definitions of Cost Accounting “Cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information. Costs can be classified for decision making. Costs are important feature of many business decisions. For the purpose of decision making, costs are usually classified as differential cost, opportunity cost, and sunk cost. It is essential to have a firm grasp of the concepts differential cost & differential revenue, opportunity cost, and sunk cost.
Use of full cost in pricing decisions is justified because ¯In the long run, prices must cover all costs to differential costs of product, the product is profitable and the firm should continue production. MANAGERS WANT TO KNOW! LO 9 Click the button to skip Example. 25 INVENTORY MANAGEMENT Inventory has a direct affect on profit and must. Differential cost or expense is the difference between the amounts of relevant costs for two alternatives. Future costs that do not differ between alternatives are irrelevant and may be ignored since they affect both alternatives similarly. A sunk cost will not change regardless of the alternative that management chooses; therefore, sunk costs have no bearing on future events and are not relevant in decision-making. The basic premise sounds simple enough, but sunk costs are difficult to ignore due to human nature and are sometimes incorrectly included in the decision-making process. Management bases decisions to add or eliminate products only on the differential items; that is, the costs and revenues that change. To illustrate, assume that the Campus Bookstore is considering eliminating its art supplies department. If the bookstore dropped the art supplies department, it would lose revenues of $, annually.