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Major areas in which differential cost analysis is useful.

The main point which distinguishes marginal cost and differential as that change in fixed cost when volume of production increases or decreases by a unit of production. In the case of differential cost variable as well as fixed cost. i.e. both costs change due to change in the level of activity, whereas under marginal costing only variable cost changes due to change in the level of activity.


Areas in which differential cost analysis is useful.

1. Accept – or – reject special order decisions.
2. Make – or – buy decisions.
3. Sell – or – process decisions.
4. Reduce – or – maintain price decisions.
5. Add – or – drop product decisions.
6. Operate – or shut down decisions.
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