What is the meaning of differential cost?
Differential cost is the difference in total costs between two acceptable alternative courses of action. The alternative actions may arise due to change in sales volume, price, product mix, or such actions as make or buy or continue or stop production, etc.
What is the difference between differential cost and opportunity cost?
A differential in accounting compares the cost of two or more items or the outcome of one choice over another. The difference in cost between the choices is the differential cost. Opportunity cost, on the other hand, represents the benefits you might miss out on when choosing one alternative over another.
Are differential cost and sunk cost Same?
Sunk costs are those costs that happened and there is not one thing we can do about it. These costs are never relevant in our decision making process because they already happened! These costs are never a differential cost, meaning, they are always irrelevant.
What is the term differential used to indicate?
Things that show a difference or act in different ways can be described as differential.
Is differential cost a relevant cost?
A relevant cost (also called avoidable cost or differential cost) is a cost that differs between alternatives being considered. In order for a cost to be a relevant cost it must be: Future. Cash Flow.
Why is differential cost important?
Differential cost can aid in making sound business decisions because it can be used to determine the costs and profits that a business might have when opting for one solution over another. Additionally, differential costs can be variable costs, fixed costs or a combination of the two types.
How is differential cost calculated?
For the company to know if the new selling price is viable, it calculates the differential cost by deducting the cost of the current capacity from the cost of the proposed new capacity. The differential cost is then divided by the increased units of production to determine the minimum selling price.
What you mean by differential?
1a : of, relating to, or constituting a difference : distinguishing differential characteristics. b : making a distinction between individuals or classes differential tax rates. c : based on or resulting from a differential. d : functioning or proceeding differently or at a different rate differential melting.