Differential cost is best defined as:

• A. The difference in total cost between two alternatives.
• B. The average cost per unit of inventory.
• C. The cost assigned to inventory under the perpetual system.
• D. The total cost of goods sold during a period.

Answer: (A)

Verified step by step guidance

1. Understand the concept of differential cost: Differential cost refers to the difference in total cost between two alternatives. It is used in decision-making to compare the financial impact of choosing one option over another.
2. Eliminate incorrect options: Review the other choices provided in the problem. For example, 'The average cost per unit of inventory' refers to inventory valuation, not differential cost. Similarly, 'The cost assigned to inventory under the perpetual system' and 'The total cost of goods sold during a period' are unrelated to the concept of differential cost.
3. Focus on the correct definition: Differential cost is specifically tied to comparing two alternatives and is calculated by subtracting the total cost of one alternative from the total cost of another.
4. Apply the concept in practice: In real-world scenarios, differential cost is used to evaluate decisions such as whether to produce a product in-house or outsource it, or whether to accept a special order at a lower price.
5. Remember the importance of context: Differential cost is relevant only when comparing two alternatives. It does not apply to situations where only one option is being considered.