Respuesta :
When considering decision alternatives, only relevant costs are included using the differential cost approach.
The cost of two potential decisions or a change in production level is referred to as a differential cost.
What is differential cost?
- Differential costs are changes in costs that may result from several factors, including an increase or decrease in output, changes in sales volume, alternative manufacturing methods, decisions to make or not make purchases, changes in product mix, etc. Therefore, a different line of action leads to differential cost.
- The cost difference that results from, for instance, replacing labor with machines with two different courses of action will be the differential cost.
- If a change in cost results from a shift in the level of activity, the differential cost is known as an incremental cost when output increases and a decremental cost when output decreases.
- Differential costs are sometimes considered to be incremental or marginal expenses. However, this is untrue.
- The absorption or entire costing method is used to determine expenses in differential cost analysis, whereas the marginal costing method only considers variable costs and leaves out fixed costs.
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