Features of Differential Costing and Incremental Costing
The essential features are discussed in our Differential Costing and Incremental Costing homework help online as follows:
- The data used in differential costing are revenue, cost, and investment used in decision-making problems.
- This cost has no place in accounting records. The costs can be decided from routine accounting records.
- The total cost is considered and not cost/unit.
- Differential cost analysis decides the future action course. It deals with future costs though standard and historical costs can be used.
- It studies the difference in cost and it studies these differences. The cost elements that remain identical or the same are not considered.
- The alternative that depicts the greatest difference between incremental revenue and increment cost is considered the best choice.
Managerial Applications of Differential Costing
Differential costing is very helpful to the management to formulate policies and make decisions including the following:
- Determining the most profitable price and level of production
- To change the product mix
- Introducing new products
- To change the production method
- To accept an offer at a reduced selling price
- Make or buy decisions
- Discontinuance of product for increasing profits and avoiding the losses
- Shut-down decisions
- Deciding an appropriate price to buy raw materials
- Equipment replacement decisions.
Treatment of Differential Cost
The differential cost can be variable cost, fixed cost, or a combination of both costs. Companies use differential cost to choose between two alternatives for making decisions that can impact the company positively. No accounting entry is needed as it is not a real transaction. There are not accounting standards, which guide the way these costs are treated.
Incremental Revenue Versus Incremental Cost
Incremental costs or marginal costs can decide the profit maximization of an organization. It happens when marginal costs are equal to marginal revenue. When a business earns more marginal revenue or incremental revenue per unit compared to the incremental cost to buy or manufacture that product, a company earns a profit.
On the other hand, if incremental costs are more than incremental revenue per unit, a company makes a loss. Thus, knowing the incremental cost of an additional unit of production and then comparing it to selling price can help to meet profit. This is explained in detail in our online help with assignment on Differential Costing and Incremental Costing.