Question

Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per pound to produce. What is the differential cost of producing Product C?

		$30 per pound
		$55 per pound
		$28 per pound
		$31 per pound

Answer 1

Concepts and reason

Cost: The concept of cost in management accounting refers to the amount paid or amount sacrificed to obtain something. The value of all the costs will have to be determined in monetary values. There are various types of costs in cost accounting. Therefore, identification of the costs is a significant task in management decision making.

Cost Accounting: The process of recording, summarizing, analyzing, allocating and controlling cost of various items produced is termed as cost accounting.

Cost Accounting systems: Cost accounting system are the accounting structures which are used by companies to determine costs and perform profitability analysis. The different types of cost accounting systems are described as follows:

• Process Costing: Process costing is a management costing technique, under which cost of product is ascertained at each stage of production. Total cost incurred are determined at each level and are allocated amongst the units produced. Process costing is used in companies where there is continuous flow of production and there are a number of production processes involved.

• Job-order Costing: Job-order costing is a management accounting technique of assigning costs incurred to jobs instead of assigning costs to departments. It is used in companies where the products manufactured are widely distinct from each other.

• Traditional Costing: Under traditional costing a single overhead rate, which is predetermined is calculated and applied to jobs in various departments.

• Activity based costing: Under activity based costing, activities that are undertaken in the manufacturing process are identified and indirect costs are allocated to the products.

Fundamentals

Differential cost: Differential cost is the difference is cost when two alternative scenarios are compared. Since, it calculates differential cost it is implied that this technique is used when there is more than one alternative to pursue. Differential cost can be both fixed as well as variable cost.

Calculate the total cost for product C as follows:

$\begin{array}{c}\\{\rm{Total cost of product C = Cost of product B + Additional cost to produce C}}\\\\{\rm{ = \$ 28 + \$ 31}}\\\\{\rm{ = \$ 59}}\\\end{array}$

Thus, total cost for product C is $59.

Calculate the differential cost as follows:

$\begin{array}{c}\\{\rm{Differential Cost = Total cost to produce C }} - {\rm{ Cost of producing B}}\\\\{\rm{ = \$ 59 }} - {\rm{ \$ 28}}\\\\{\rm{ = \$ 31}}\\\end{array}$

Thus, the differential cost of producing product C is $31.

Ans:

The differential cost of producing product C is $31.