Differential costs:

A difference in costs between any two alternatives is known as differential cost. A differential cost is also known as incremental cost. Technically an incremental cost should refer only to an increase in cost from one alternative to another. Decreases in cost should be referred to as decremental costs. So here we see that differential cost is broader term consist of both incremental cost & decremental cost.  

Role in decision-making

Differential cost can be either fixed or variable. To illustrate assume that Keya cosmetics ltd. is thinking about changing it’s marketing method from distribution through retailer to distribution by door-to-door direct sale. Present cost and revenues are compared to projected costs and revenues in the following table:


                                     Retailer                Direct sale             Differential cost
                                  Distribution            Distribution                and revenue
Revenue                      $500,000                  $600,000                       $100,000
Deduct                      =======================================
Cost of good sold         $150,000                 $200,000                   $50,000
Advertising                  $50,000                    $25,000                     $(25,000)
Commission                   - 0 -                        $20,000                     $20,000
Depreciation                $25,000                    $50,000                     $25,000
Other expenses            $20,000                    $20,000                         -- 0 -- 
Total                            $245,000                   $315,000                   $70,000
Net income                  $255,000                   $285,000                   $30,000
                                  ======================================
According to the analysis the differential revenue is $100,000 and the differential cost is $70,000 leaving a positive differential net income $30,000 under the proposed marketing plan.
From the given table the company can easily decide that which marketing plan they should follow. As we see in the above analysis the net income under door-to-door is $30,000 higher than the previous one. And they can get it simply focusing on differential cost, revenue and net income. By this way differential cost helps in decision-making.

Standard costs:

Standard costs are target costs, which should be attained under specified operating conditions. They are expressed as a cost per unit. For example: Hospitals have standard cost (for food, laundry and other items) for each occupied bed per day, as well as standard time allowance for certain routine activities, such as laboratory test.                                                 

Role in decision-making

Standard cost is used to integrate costs in the planning and pricing and pricing structure of a business.  Once the Standard cost has been decided, the actual cost may be compared with the standard. If it equals the standard then the actual outcome has matched expectations. If the actual cost is different from the standard cost allowed, then there will be variance to be investigated, whether it is favourable or unfavourable. When the actual cost is less than the standard cost then it is called favourable and when the actual cost is greater than the standard cost then it is called unfavourable. In case of favourable term management will accept the proposal and in case of unfavourable term, they will reject it.
Direct cost & Indirect cost