Question

Why is it worthwhile to isolate relevant costs under the differential cost approach when the total cost approach results the same outcome?

Answer 1

Solution. When an organization decides to business in a competitive market, it needs to study and analyse various courses of operation to sustain for long run. General objective of any organization is to meet set target of profit along with social impact in society. To meet such objectives, an organization needs to prepare and analyse different courses of action, relevant costing is employed to determine costs involved in such action to facilitate decision making.

Differential analysis is employed to analyse relevant costs faced by an organization as it takes into account only costs which affects an alternative and ignores irrelevant costs to compute best alternative course of action. It is employed to determine which course of action holds profitable for the organization. Whereas, total cost involves all expenses incurred while operating an alternative course of action. The main motive of relevant cost is to take into account only costs that help an organization in analyzing determining and taking decision between different courses of action. Applying total cost approach, will lead to confusion and time consuming as it involves all expenses related to courses of action, though both approach results to same outcome. So, it is worthwhile to isolate relevant costs under the differential cost approach.