Question

Compare and contrast between differential cost analysis and marginal cost analysis

Answer 1

Answer:

Difference Between Marginal Costing and Differential Costing:

1. Marginal cost is a unit concept and applies to output per unit basis. Whereas Differential cost is a total concept and applies to a fixed additional quantity of output.

2. Marginal costing is presented by showing contribution per unit and fixed cost as a total amount. Whereas Differential costs are presented in totals in both formats – i.e. under marginal cost as well as absorption cost techniques.

3. Product cost under differential cost analysis may contain fixed costs, which will not be so under marginal costing.

4. Marginal Cost can be incorporated in the accounting system but Differential cost is determined separately from the analysis of accounting records.

5. In Marginal Costing Managerial Decisions are based mainly on Contribution. But in Differential Costing Differential Costs are compared with incremental or decremental revenues for evaluating managerial decisions.

Answer 2

Differential cost analysis and marginal cost analysis

Explanation:

Marginal costing considers the change in costs in order to produce an additional unit of output whereas differential costing is the difference between the cost of two alternative decisions, or of a change in output levels.

Marginal costing

• Marginal costing considers the change in costs in order to produce an additional unit of output
• The purpose of marginal costing is to evaluate whether it is beneficial to produce an additional unit/small number of additional units.
• Marginal cost is compared with marginal revenue to calculate the impact of a decision.

Differential cost analysis

• Differential costing is the difference between the cost of two alternative decisions, or of a change in output levels.
• The purpose of differential costing is to evaluate the most suitable option between alternatives.
• Costs of two scenarios are compared and the less costly alternative is selected.

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