Home › ACCA › Management Accounting › Differential Analysis › Which costs belong in a differential analysis of…
Which costs belong in a differential analysis of two alternatives?
AAll costs that the business will incur next year
BOnly the fixed costs shared by both alternatives
COnly the costs that change between alternatives
DAll costs already spent on the assets involved
Answer & Solution
Correct answer: C. Only the costs that change between alternatives
1. Differential analysis compares the benefits and costs of two options and picks the better net result.
2. Only amounts that differ between the two options can affect that comparison.
3. Costs that stay constant across both options drop out, because they cannot separate one choice from the other.
4. Past expenditure is likewise excluded, since it is the same whichever option is taken.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.1 Introduction_
Related questions
Alongside the numbers, what else should a differential analysis take into account?What limits the usefulness of the average rate of return and cash payback methods?Asset 1 has discounted cash flows of $108,724 over four years and Asset 2 has $107,733 oncOne proposed asset gives cash flows for four years and a rival gives cash flows for six yeAsset 1 costs $100,000 and has discounted cash flows of $121,526. Asset 2 costs $140,000 aThe present value of the future net cash flows from an asset is $118,016 and the asset cosEquipment costs $100,000 and gives net cash flows of $24,000 a year for six years. The preWhat is the future value of $1.00 in three years at an interest rate of 6%?