Two methods used in managerial accounting for decision-making are differential costing and marginal costing. An explanation of each is given below:
Differential costing is a strategy used to analyse the costs and advantages of two or more alternatives in order to ascertain the cost and revenue differences between them.
The difference in cost between two alternatives is known as the differential cost, and the difference in revenue between two alternatives is known as the differential revenue. This method is employed when making quick decisions, such as whether to accept a customer’s particular order or not.
Marginal costing is a technique that concentrates on how costs behave and the contribution margin of goods and services. It divides the costs into fixed costs and variable costs.
Fixed costs never change regardless of the volume of production or sales, as opposed to variable costs, which fluctuate with these factors. The difference between the selling price and the variable cost per unit is known as the contribution margin.
In order to make decisions, such as choosing the best production level or pricing scheme, marginal costing is used.
It assists companies in identifying the breakeven point, which is the point at which total revenue and total costs are equal and at which a company begins to turn a profit.
In conclusion, while marginal costing concentrates on the behaviour of costs and the contribution margin, differential costing evaluates the costs and benefits of two or more alternatives.
Although both methods are utilised in managerial accounting for making decisions, their methods and applications vary.
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