What is the Difference Between Marginal Costing and Differential Costing?
🆚 Go to Comparative Table 🆚Marginal costing and differential costing are two techniques used in managerial accounting for decision-making purposes. They have different approaches and applications. Here are the main differences between the two:
- Purpose: Marginal costing is used for decision-making in cases where there is a need to evaluate a change in the level of output or production. On the other hand, differential costing is used to evaluate the most suitable option between alternatives or to compare the costs and benefits of two or more alternatives.
- Scope: The scope of differential costing is wider, as it is applicable to short-term, medium-term, and long-term decision-making. In contrast, marginal costing is mainly used for short-term and medium-term decision-making.
- Cost Classification: Both techniques are based on the classification of costs into fixed and variable costs. In marginal costing, the focus is on the behavior of costs and the contribution margin, which is the difference between the selling price and variable cost per unit. In differential costing, the differential cost is the difference between the cost of two alternatives or a change in output levels.
- Comparison: In marginal costing, marginal cost is compared with marginal revenue to calculate the impact of a decision. In differential costing, the differential cost and differential revenue are compared to determine the best course of action.
In summary, marginal costing focuses on the change in costs and contribution margins, while differential costing compares the costs and benefits of two or more alternatives or changes in output levels. Both techniques are used in managerial accounting to support decision-making processes.
Comparative Table: Marginal Costing vs Differential Costing
Here is a table comparing marginal costing and differential costing:
| Feature | Marginal Costing | Differential Costing |
|---|---|---|
| Definition | Marginal costing considers the change in costs to produce an additional unit of output. | Differential costing is the difference between the cost of two alternative decisions or a change in output levels. |
| Purpose | Evaluates whether it is beneficial to produce an additional unit of output. | Evaluates the most suitable option between alternatives. |
| Comparison Criteria | Marginal cost is compared with marginal revenue to calculate the impact of a decision. | Differential cost compares the costs and benefits of two alternatives. |
| Focus | Used for short-term and medium-term decision-making. | Can be used for short-term, medium-term, and long-term decision-making. |
| Optimal Production Level | Helps identify the optimal level of production. | Helps evaluate different production alternatives or strategies. |
| Technique | Concentrates on the behavior of costs and the contribution margin. | Compares the costs and benefits of two or more alternatives. |
In summary, marginal costing focuses on the change in costs to produce an additional unit of output and is mainly used for short-term and medium-term decision-making, while differential costing compares the costs and benefits of two or more alternatives and can be used for short-term, medium-term, and long-term decision-making.
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