Question

The cost of alternative ‘A’ is $25,000 and the cost of alternative ‘B’ is $20,000. In managerial accounting, the difference of $5,000 in costs of two alternatives would be termed as:

Answer 1

"differential revenue," "differential costs" and "differential net operating income."

Differential Accounting

Differential accounting presents two or more possibilities along with the forecast revenue and costs of each. It compares the revenue and costs of the possibilities to each other, rather than to the company’s budget. For example, Choice A has forecast revenue of $60,000 and costs of $20,000 while Choice B has forecast revenue of $70,000 and costs of $25,000. Differential accounting compares these two options to each other, showing an estimated net operating income of $40,000 for Choice A and $45,000 for Choice B. There is a $5,000 net operating advantage by opting for Choice B.

Differential Revenue

Differential revenue is the difference in revenue between the various choices. Using the previous example, Choice A has $60,000 in forecast revenue while Choice B has $70,000. The differential revenue is $10,000. Revenue is a variable item, since it does not account for unplanned price reductions or unsold merchandise.

Answer 2

In managerial accounting, the difference of $5,000 in costs of two alternatives would be termed as differential costing.

• Differential costing refers to the difference between costs of two alternatives.
• These differences can be due to a change in output levels, the volume of sales, or any new decision.
• Such costs form a part of the budget but not book records.
• The alternative which gives the maximum difference between differential revenues and costs should be adopted.