Question

4-2.What is the difference between a sunk cost and a differential cost?

Answer 1

Answer:- Sunk Cost:-Those cost that has been irreversibly incurred or committed and cannot therefore considered relevant to a decision. Sunk costs may be termed as irrecoverable costs. Sunk costs are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be in the future. For example, the written down value of assets previously purchased are sunk costs. Sunk costs are not relevant for decision making because they are past costs.

Differential costs:-It is the change (increase or decrease) in the total costs (variable as well as fixed) due to change in level of activity, technology or production process or method of production. The differential costs is useful for decision making in the following areas:-

1.Capital expenditure decisions

2.Make or buy decisions

3.Production planning

4.Sales Mix decision

5.Production or product decision

6.Change in level or nature of an Activity