Differential Costing

Differential costing is a financial method used to compare the costs and benefits of different choices or paths in a decision. It focuses on the costs that change between options, known as incremental or differential costs, ignoring those that stay the same. For example, if a company considers whether to produce or outsource a product, differential costing looks at the additional costs or savings each option would generate. This approach helps managers make informed decisions by highlighting the financial impact of each alternative, ensuring they evaluate only the relevant variations in costs and revenues.