Marginal Costing and Differential Costing

Introduction to Marginal Costing and Differential Costing

Sometimes marginal costing is confused along with differential costing'. Differential cost is the net increase or decrease in total cost resultant from a variation in production. Usually, increase or decrease is in the variable or marginal cost but within specific conditions, fixed cost might also be affected. Therefore, differential cost involves an element of fixed cost also, besides the variable costs. So, the term 'differential cost can be evaluated favourably with the economist's concept of marginal cost.

The differential cost is known as incremental cost when the cost increases and decremental cost, while the cost decreases. So differential costing, incremental costing' and 'decremental costing' are substitute terms, that are different from marginal costing or variable costing and direct costing. The way of application of differential costing is somewhat dissimilar from that of marginal costing. Within differential costing, differential costs of several alternatives are compared with the differential revenues and the decisions are take place on the basis of highest net gain. When, evaluating the viability of dissimilar projects, and making a choice out of various alternative proposals, differential costing assists in a better way than marginal costing.

If, within marginal costing, when deciding regarding to the profitability of products or making cost-benefit analysis, fixed costs are also referred at some stage, it obtains the shape of differential costing.1 therefore, practically the aim of applying the two methods is the same and here we have not made any variation in the application of these methods to the problems that management has to face in its routine or particular decision making process.

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