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The amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative is differential cost.
What is Differential Cost?
- Differential cost is the difference in costs between two possible decisions.
- The expense arises when a company must choose between multiple similar choices and choose one while rejecting the others.
- When faced with such circumstances, corporate executives must compare the costs and profits of each alternative to determine which is the most practical.
- The expenses incurred to produce a product are referred to as its cost.
- Direct labor, direct materials, consumable production supplies, and factory overhead are all included in these prices.
- The cost of the labor necessary to provide a service to a customer can also be considered when calculating product cost.
- In the latter scenario, all expenses associated with a service, such as compensation, payroll taxes, and employee benefits, should be included in the product cost.
- Costs that cannot be recognized on a company's balance sheet are referred to as period costs.
- In other words, they are recorded as an expense on the income statement in the period in which they are incurred. Some of the examples of Period cost are CEO salary, Marketing expense, selling, general and administrative expense.
- If necessary, a business or household can live without a discretionary expense.
- Nonessential spending is sometimes used to identify discretionary costs. This indicates that even if all discretionary consumer spending is stopped, a business or household can continue to function.
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