Marginal costing and Differential Costing
Businesses use differential and marginal costing to make critical decisions regarding financial issues for the short and long term. Differential and marginal costing give managers tangible numbers with which to work to develop a strategy. If a business does not use the two methods of costing to make decisions, its risks are not optimal or financially lucrative.
Definition of differential costing
A differential costing is simply the difference in cost between two different possible decisions. Business managers often face situations that require choosing a solution between two or more different alternatives. If the first solution costs US $ 2,000 to a company and the second solution costs US $ 1,000, the differential cost between the two solutions is US $ 1,000. Similarly, managers may have more than two solutions to choose from. In that case, they must specify the two solutions to which the differential cost applies.
Definition of marginal costing
The marginal costing is the cost of producing one more unit, or the saving of producing one less unit, if we want to see it that way. It will vary, as the average cost, depending on the number of units produced. In economics and finance,