We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Differential Analysis?

Jim B.
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Differential analysis is a method of comparing two or more business alternatives to each other in an attempt to decide which is the right choice. If using this type of analysis with a strictly numerical approach, a business would compare only the relevant costs of the alternatives and the resulting benefits of each. This means that costs already incurred and ones that are the same for the alternatives would be ignored. Businesses may also consider the non-monetary, intangible benefits of the choices when performing differential analysis.

Most businesses are forced to make difficult financial decisions each day, and the consequences of these decisions can have a great impact on whether the business is ultimately successful. For that reason, business owners must develop consistent methods for making these decisions, especially when it comes to potentially costly ones. Differential analysis is one such method, as it takes all of the relevant numbers associated with the possible choices and gives the owner of the business an idea of where he or she will stand with each possible decision.

The key concept in understanding differential analysis is the concept of relevant costs. This essentially means that the only costs that should be considered when making a choice between alternatives are the ones that actually relate to how each alternative will play out in the future for the business. Non-essential costs for this type of analysis would include those costs that would not differ among the alternatives as well as sunk costs, which are costs that have been incurred prior to the current analysis.

For example, a business might want to purchase a new machine that is going to cut production costs significantly from an old machine. It would seem like an easy decision, but the new machine would have to be expensed significantly high in its first year of existence, thus affecting the profit margin. The old machine's depreciation, on the other hand, is a sunk cost and irrelevant for the purposes of differential analysis. Thus, the business might have to decide whether it can afford the financial hit of the first year in order to reap the machine's future benefits.

It's important to note that differential analysis is a process that may be stretched beyond mere numbers. There could be intangible benefits to a certain decision that might eventually affect the business' profits or even go beyond monetary gain. For instance, an advertising campaign might be costly to a business but might be important in getting the brand name out to the public, thus making it more beneficial than saving the marketing costs. In terms of non-monetary issues, a company might be able to save money and produce more using a new production technique, but if the technique isn't environmentally sound, it might engender bad will among the community that would outweigh the monetary benefits.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
By Logicfest — On Mar 10, 2014

Any analysis that doesn't contemplate those intangibles is, more often than not, useless. For example, let's say we're looking at two printing presses that both cost about the same amount of money. One is made in Germany while the other is made in the United States. The one from Germany is more durable, but very expensive to fix and it takes a long time to get parts. The one made in America may not be as durable, but parts are readily available locally and the press can be repaired quickly and less expensively than the German one.

In that scenario, one has to look at the unpredictable qualities such as expense of repair and potential downtime to make a reasonable decision.

Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.