Question

Why is a differential analysis of relevant items preferred to a detailed listing of all costs and revenues associated with each alternative?

Answer 1

A Differential analysis is prepared for evaluation of various alternatives like retain or replace, make or buy, acceptance of special order, sell or process further, etc. A differential analysis is more meaningful since it considers only relevant cost in analysis and management can focus on the same. It ignores fixed costs and unavoidable costs since they are irrelevant cost which does not need management attention to evaluate the alternatives.

So to summarise

· Differential analysis helps in faster decision making

· Helps in evaluation of relevant revenues and expenses only

· Helps management in focusing to the point