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2. DIFFERENTIAL COST 3. MEANING : Differential cost is the change in the cost which may take place because of the adoption of an alternative course of action necessitated by change in sales volume ,product mix or changes in method of production or make or buy decision. 4. Differential cost are the relevant cots for making alternative choice . Differential cost is the difference in the total cost of alternative choice. When the change in cost occurs due to the change in activity from one level to another ,differential cost is referred to an incremental cost. The differential cost analysis is based on the theory that a choice is worthy of selection as long as the incremental revenue is more than the differential cost .any choice whose differential cost is more than incremental revenue is not worthy of selection. 5. WHY DIFFERENTIAL COSTING ? Management may rely on differential cost for taking many valuable policy ,such as is it profitable to go in further processing of a product ? Is the placement of existing asset by an improved model profitable Whether a new sale territory can be opened/ Whether a new product can be profitably introduced? 6. APPLICATION OF DIFFERNTIAL COSTING DEPTH OF PROCESSING DETERMINATION OF MOST PROFITABLE LEVEL OF PRODUCTION AND PRICE ACCEPTANCE OF AN OFFER AT A LOWER PRICE ADDING A NEW PRODUCT EQUIPMENT REPLACEMENT 7. DEPTH PROCESSING Differential cost may be applied to decide whether it would be more profitable to sell a product as it is or process it further in to a different product to be sold at an increased price ; the decision will be arrived at by comparing the added cost of manufacture with the incremental revenue. If incremental revenue as the result of further processing is more than the additional cost of processing ,further processing is recommended. 8. DETERMINATION OF MOST PROFITABLE LEVEL OF PRODUCTION AND PRICE Differential cost is calculated and is matched against the differential revenue in order to determine the best price and optimal level of production. The differential revenue is calculated by deducting the sales value at one level; from the sales of previous level. As long as the differential revenue is more than the differential cost ,level of production is increased. If differential cost is more than the differential revenue ,that level is not beneficial to the concern and level of prior to this will be the optimum level of production. A company can continue to increase the production if, incremental revenue is more than the differential cost. 9. ACCEPTANCE OF AN OFFER AT A LOWER PRICE OR OFFERING A QUOTATION AT LOWER SELLING PRICE IN ORDER CAPACITY Sometimes the management is interested to increase the capacity but the increased production can be sold at a reduced sale price. Under such situation the differential cost is calculated by deducting the cost present capacity from the cost of new capacity . The differential cost is divided by the increased units of production to calculate the minimum price. Any price above the minimum price will added to the revenue of the concern. 10. EQUIPMENT REPLACEMENT Differential cost analysis ids frequently used in making the decision of whether it is more profitable to replace machinery or equipment with new and improved types or to continue to use present equipment until it is worn out. In equipment replacement studies prior importance is given to depreciation ,as a cost of element. 11. IN A NUT SHELL. In most of the cases differential cost are compared with incremental revenue . Both marginal costing technique and differential costing analysis are used for decision making problems. OTHER AREAS OF APPLICATION Closing down or suspension Continue operation at a loss Fixation of selling price Suitable product mix