Page 93 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes The following are the examples of cost that are irrelevant:
(a) Sunk costs, i.e., those costs which have already been incurred are irrelevant.
(b) Book value of assets
(c) Cost of fully utilised resources, i.e. where a limiting factor exists it will be used to the fall
extent and 1611, therefore, cost the same whatever alternative is considered.
(d) Fixed cost – Any item which remains constant whichever alternative is chosen is not a
differential cost and can be ignored in choosing alternatives.
Self Assessment

Fill in the blanks:
1. The technique used for analysing …………………… costs is known as differential costing.
2. …………………… is “a technique used in the preparation of ad hoc information in which
only cost and income difference between alternative courses of action are taken into
consideration.”

3. “…………………… cost” is used to denote differential cost when the increase in cost in due
to increase in the level of production.
4. …………………… cost is used when the difference in cost is due to decreases in the level of
production.
5. The differential costing is based on the implication that only the …………………… cost,
which will change as a result of the decision is useful for decision-making.

5.1.2 Marginal vs. Differential Costing

Differential costing is similar to marginal costing under the following respects:
(a) Both the techniques are based on cost analysis for presenting the information to management.
(b) Costs are analysed on the basis of their behaviour under both the techniques.

(c) Both the techniques serve the same purpose of planning and decision-making by the
management.
(d) Both the techniques will be same if the fixed costs remain same for alternative proposals.

(e) Differential cost resembles to economist’s concept of marginal cost.
However, differential costing differs from marginal costing in the following respects:
(a) The scope of marginal costing is narrow, while that of differential costing is broader and
hence it has wider applications.
(b) Marginal costing technique is useful in making decisions in the short run, whereas
differential costing is useful in taking both short run and long run decisions where fixed
costs do alter.
(c) Marginal cost is defined as the sum of all variable casts. Such a concrete definition is not
possible under differential cost. It can at best be defined as an increase or decrease of total
cost owing to rise or fall in production.
(d) Marginal costing presents cost information under contribution margin approach, whereas
differential costing can be presented both under absorption costing and marginal costing
techniques.

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