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Marginal Costing and Differential Cost Analysis
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Some management accountants use differential cost as a synonym to marginal cost. In fact, the theory of marginal costing is only a part of differential cost analysis. These two are similar in some aspects and differ in certain others. The points of similarities and differences are discussed below:
Similarities
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Both techniques are based on the classification of costs into fixed and variable. If fixed costs do not change, the result under both remain same.
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Both techniques are used for cost analysis.
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Both techniques are used for managerial decision-making and formulating policies.
Differences
The following are the differences between differential cost analysis and marginal cost analysis:
Table 1
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Differential Cost Analysis
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Marginal Costing Analysis
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i.
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It is a costing technique used for decision-making purpose with the use of differential revenue and differential cost.
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It is a technique used in ascertaining the marginal cost and effect on changes in profit due to changes in volume.
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ii.
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The differential costing can be applied in varied alternative proposals hence the scope is wider.
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The scope of marginal costing is comparatively lesser.
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iii.
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The differential costing uses the accounting information and it can only be part of accounting system.
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The marginal costing system can be included into accounting system.
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iv.
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The main analytical tools used in differential costing are, incremental/ decremental cost, incremental revenue and incremental/decremental profit.
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In marginal costing, the main analytical tools are, P/V ratio, Break-even point, contribution, CVP analysis etc.
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v.
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It is not possible to ascertain exactly the differential cost and sometimes it is used in conjunction with costs and opportunity cost.
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The marginal cost can be calculated exactly by adding variable overheads to prime cost.
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vi.
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The differential costing can be used for short-term, medium-term and long-term decision-making.
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The marginal costing is mainly used for short-term and medium-term decision-making.
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