Page 91 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II Pooja, Lovely Professional University

Notes Unit 5: Differential Costing

CONTENTS
Objectives
Introduction

5.1 Meaning of Differential Costing
5.1.1 Features of Differential Costing
5.1.2 Marginal vs. Differential Costing

5.2 Applications of Differential Costing
5.3 Summary
5.4 Keywords
5.5 Review Questions
5.6 Further Readings

Objectives

After studying this unit, you will be able to:
 Discuss the concept of differential costing;
 Explain the difference between differential cost analysis and marginal costing;
 Discuss the practical applications of differential costing.

Introduction

Differential pricing, also commonly referred to as discriminatory pricing or multiple pricing, is
a pricing strategy in which a company charges different products for the same product or service
based on a variety of customer and transaction-related factors, including the quantity ordered,
delivery time and payment terms. Differential cost is the difference between the cost of two
alternative decisions, or of a change in output levels. Here are two examples:
Example of Alternative Decisions: If you have a decision to run a fully automated operation that
produces 100,000 widgets per year at a cost of $1,200,000, or of using direct labour to manually
produce the same number of widgets for $1,400,000, then the differential cost between the two
alternatives is $200,000.

Example of Change in Output: A work centre can produce 10,000 widgets for $29,000 or 15,000
widgets for $40,000. The differential cost of the additional 5,000 widgets is $11,000.
In essence, you can line up the revenues and expenses from one decision next to similar
information for the alternative decision, and the difference between all line items in the two
columns is the differential cost. We will study this in more detail in this unit.

5.1 Meaning of Differential Costing

Differential costing is a broader and more fundamental concept than marginal costing and
hence has a much wider application. It helps in making appropriate decision by examining all

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