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Decision-making is an integral part of all management functions. It is the process of choosing the among alternative courses of action. Managers have to spend a considerable amount of time and thought in making decisions.
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Costs, which affect the managerial decisions, are called relevant costs. All types of costs are not relevant. Only the costs, which are futuristic in nature and differ among alternatives, are considered as relevant costs.
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Differential cost analysis or differential costing is a special technique to help management to take decision. It shows how costs and revenues would be different under different alternative courses of action.
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With the help of a technique like marginal costing, CVP analysis and differential analysis, management makes decisions like determination of profitable levels of production, make or buy, process or sell, purchase or lease, accept or reject new orders etc.