what are the differences between marginal costing and differential costing? and is it right to classify marginal costing as short decision making approach and differential costing as long-run decisioin making approach.
thanks in advance.
Dear Srikanth Potharla
The main difference between marginal costing and differential costing is predominantly dependent on the nature of decision making required.
Marginal costing is used for decision making in case of the need to evaluate a change in the level of output whereas differential costing is used to assess the effects of two or more alternatives. These two concepts are used for better decision making by efficiently allocating scarce resources.
Dear Srikanth Potharla,
I would partiality agree with your statement that marginal costing can be classified as short decision making approach and differential costing as long-run decisioin making approach.
However, when the marginal costing apparoach is used to evaluate the .change in the level of costs of units, this will have long run impact on the the strategy...
Thank you
Best regards
According to my knowledge both are one and the same differential costing is another name of marginal costing.
Marginal costing is cost of an additional unit which is significant to determine optimal where as differential cost is same if expressed in differential function. So for complex decision, we use it.
In a production run of an item e.g Citroen DS car, Marginal cost is the cost of making one more item i.e one more Citroen DS car.
Differential costing involves the comparison of different items eg, the cost of making a Citroen DS car compared to the cost of making a different newer design of car the Citroen CX. This is an factual example from the 1970's.
Trust that helps, cheers
Differential costs are wider than marginal costs, because marginal costs are differential costs.
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