Question

What is the concept describing of differential analysis? How is this different from regular cost analysis?

How is differential analysis used in decision making? What type of situations would you use differential analysis to help in your decision making?

Answer 1

The concept used in differential analysis is that it is used to compare the alternative solution to a particular problem and eventually select the best from the possible solutions . Here the analysis mainly focuses on the differential cost , benefits which the possible solutions are providing . So in short the differential analysis consider the incremental benefit per the unit cost to choose the optimum alternative.

It is basically not a starting cost analysis method rather it comes into picture after the basic cost analysis prepared the possible solution for a problem to select the best out them.

It is important from the point of view that out of the good solutions what is the best considering the current situation by comparing individual solution. It allows the user tools to see that if one solution is showing more cost than others then if the incremental benefit is there or not and basis which he or she can go for optimum solution.

It can be useful in variety of situation for examples in case company trying to launch new products or stopping a product line, whether to go for in-house manufacturing or outsource.