Decision Making

Through Differential
Costing
CA PARVESH AGHI
Example

In a light engineering company, Kitchen mixer machines are manufactured.

Prepare a schedule showing the total differential costs and increments in

revenue from the following data. At what volume the company should set
its level of production?
 FINANCIAL DATA
Total varaible
Output Selling price per machine Total semi fixed costs cost Total Fixed cost

No in lakhs Rs per unit Rs in lakhs Rs in lakhs Rs in lakhs

         
0.6 240 30 83.6 28.4
1.2 220 30 163.6 28.4
1.8 200 34 255.6 28.4
2.4 180 34 315.6 28.4
3 160 40 355.6 28.4
3.6 140 40 380.4 28.4
 Comparative statement of incremental
revenue & differential cost
Output Sales Incremental sales Total cost Differential cost  
No in
lakhs Rs in lakhs Rs in lakhs      
           
0.6 144  142   
1.2 264 120 222 80 40
1.8 360 96 318 96 0
2.4 432 72 378 60 12
3 480 48 424 46 2
3.6 504 24 448.8 24.8 -0.8
Analysis:
In the above case, the output
level should be fixed at Rs.3
lakhs where the selling price is
at Rs.160 per machine.
Under differential cost method,
the decision criterion is that it
would be profitable to increase
the output as long as the
incremental revenue equals or
exceeds the differential cost.
Analysis:

Up to Rs.3 Lakhs level the After that level the

incremental revenue is differential cost is more
more than differential cost than the incremental
thereby adding to the revenue thus resulting in a
profit figure. loss on additional output.
Exercise
Your best quote that reflects your
approach… “It’s one small step for
man, one giant leap for mankind.”

- NEIL ARMSTRONG