costs, also called differential costs, are the additional costs from selecting a certain course of action.

Differential costs are an important concept in managerial accounting and decision-making processes. They refer to the difference in cost that results from choosing one alternative over another. Understanding differential costs helps businesses and individuals make informed choices by evaluating the financial impact of different options.

For instance, consider a company deciding whether to manufacture a product in-house or outsource it. The costs associated with each option, such as labor, materials, overhead, and potential savings, are analyzed. The differential cost would be the difference between the total costs of manufacturing in-house and the costs of outsourcing.

By focusing on these additional costs, organizations can determine which course of action is more financially viable. This approach is critical when making budgeting decisions, evaluating project proposals, and conducting cost-benefit analyses. Overall, differential costs are essential for strategic planning and resource allocation, enabling better financial outcomes through informed decision-making.