Marginal costing and Differential Costing

the marginal costing is the increase in the total cost that occurs when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a product or service. In general terms, the marginal cost in each production level includes the additional costs required to produce the next unit.

If the production of additional vehicles requires, for example, the construction of a new factory, the marginal costing of these additional vehicles includes the cost of the new factory. In practice, the analysis is segregated in short and long-term cases. At each level of production and in the period of time considered, the marginal costs include all costs that vary with the level of production and the rest of costs are considered fixed costs.

Example of differential costing

The team breaks down during the work days and it is the responsibility of the managers to decide if the business should pay to fix the equipment or buy a new one completely. For example, an old industrial coffee grinder in a coffee shop could break down and require repairs costing $ 1,000. If a new industrial coffee grinder costs US $ 3,000, the differential cost between the two alternatives is US $ 2,000.

Example of marginal costing

For example, the cost of 25 articles is Rs. 25,000 and that of 51 articles is
Rs. 25,225, the marginal cost is Rs. 225 (i.e., Rs. 25,225 – 25,000).
Thus, the total cost is the aggregate of fixed cost and variable cost and if production is increased
by one more unit, its cost can be computed as follows:
TCn = FC + vQ ………….. (1)
TCn+1 = FC + v (Q+1) ………….. (2)
∴ MC = v (Subtracting 1 from 2)