Differential costing and marginal costing are two techniques used in managerial accounting for decision-making purposes. Here is an explanation of each:
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Differential Costing:
Differential costing is a technique that compares the costs and benefits of two or more alternatives to determine the difference in cost and revenue between them. The differential cost is the difference in cost between two alternatives, while the differential revenue is the difference in revenue between two alternatives. This technique is used for short-term decision making, such as determining whether to accept a special order from a customer or not.
Marginal Costing:
Marginal costing is a technique that focuses on the behavior of costs and the contribution margin of products or services. It separates the costs into variable costs and fixed costs. Variable costs are those costs that vary with the level of production or sales, while fixed costs remain the same regardless of the level of production or sales. The contribution margin is the difference between the selling price and variable cost per unit.
Marginal costing is used for decision-making purposes, such as determining the optimal production level or pricing strategy. It helps businesses determine the breakeven point, which is the point at which the total revenue equals the total costs, and beyond which the business starts generating profits.
In summary, differential costing compares the costs and benefits of two or more alternatives, while marginal costing focuses on the behavior of costs and the contribution margin. Both techniques are used in managerial accounting for decision-making purposes, but they have different approaches and applications.