That’s not a cost... that’s revenue. Holy fuck dude... are you trolling at this point???

Differential costs only compares costs
Differential revenue only compares revenues
If you included revenue given up in costs and in revenues, your differential net income would be miscalculated.

Revenue given up does not represent a cost in the context of differential comparison. How do you not get that?

You’re thinking about differential net income, which is the sum of differential revenues and differential costs.

Remember, a cost in accounting is an actual COST. It is not the concept of what is given up (eg. opportunity cost, or comparison of revenues in a differential net income comparison). It is literally a cost. Something that will hit the financials. Something that goes through the GL in entries, either accrued or incurred.

If you wrote this out as a crude income statement, you start with revenues, then you have expenses, and then you have net income. If you have income statement A in column 1, and income statement B in column 2, then column 3 is the differential. You start at the top. Once you get though all revenues, you have gross revenue differential. Then you do costs, and then you have sum of costs differential. Then you have at the bottom net income differential. Not earning a revenue hits that top part, the revenues, but it does not change your cost calculations in a differential comparison (because we are thinking in terms of the income statement, or a simplified or slightly tailored internal income statement).

This post was edited by Canadian_Man on Sep 28 2017 08:10pm

The interest that he will be giving up by withdrawing his savings and using it is an opportunity cost. We're not talking about financial statements, this is for an analysis.

Relax dude. My point was that if his income given up is the answer of what is not a differential cost, because it's an opportunity cost, how is that different than the interest income he will be giving up?

That is incorrect, but if you are interested, I will explain further.

"Opportunity cost" is a term that is used to illustrate "scarcity". Opportunity cost is not strictly an accounting term, and the word "cost" the term is not used in a strict accounting sense. It refers to the next best choice that was given up, which may mean deciding between two undesirable choices, comparing desirable choices, etc.

"Differential cost" is a term which uses the word "cost" in the strict accounting sense. In accounting, a "cost" typically refers to something that hits the P&L statement on one of the cost lines (ie. cost of goods sold, operating costs, etc). A cost does not fall in the "revenues" line on the P&L.

Here is an example. Let's say a company wants to sell an asset, and they have locked in offers with no other conditions attached. If choice (A) is to sell an asset now for net profit of $10, and choice (B) is to wait 3 days and sell the asset for $12, but the company goes with choice (A), then the "opportunity cost" would have been to wait 3 days to get $12. The differential revenue between the two would be $2. The differential cost between the two would be $0. The differential net income between the two if we pretend there's nothing else in this equation, is $2.

An opportunity cost can represent a number of things, many of which are not actual "costs" in the sense of what hits line items on financials. Whereas, "differential cost" refers strictly to costs. Giving up revenue is not a "cost" in this context.

This post was edited by Canadian_Man on Sep 29 2017 06:54pm