Cost accounting is one of the most important tools applied in the business today. The overall aim of cost accounting is to provide insights to the management on the most suitable and cost-efficient system that the organization can adapt based on its capability and effectiveness. We can define cost accounting as a method which sums together all the production expenditure, categorize, and examine them based on their occurrences. Once all the expenses are gathered and recorded, the information obtained is used by the management to set out the selling standards of the company. Besides, it also assists the business in identifying possible investment opportunities. Hence, many organizations incorporate the information obtained during the accounting process in decision making and planning process of their operations. The following project seeks to explain in details the two major accounting methods, which are marginal costing and differential costing as well as their application in a business setup.
In a broad sense, managers use comprehensive cost information to regulate business operations and also identify opportunities that lead to future expansion. In recording all the information through cost accounting reports, every organization is supposed to make necessary changes based on the goals and projections as highlighted from the business perspective (Beattie, 2014) . The fact that each business is different from the other, cost accounting data recorded should not be compared with other business since each business has its unique way of generating their expenditures. Hence, accounting data should be specific for a particular business setting.
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Cost accounting is an essential tool for business. For instance, it has enabled many firms to minimize costs and maximize their profits. Therefore, to run any successful business, the management needs to know all the logistics applicable to the firm and in every department to achieve their long term financial success (Stickney & Weil, 2015) . From the above discussions, it highlights the impacts of cost accounting to an organization. For example, t is through cost accounting that managers can set prices for their product. Additionally, it is through the formulation of cost structure that put the business in a position of achieving financial success, and hence, it is a critical element in decision making of the firm.
Marginal costing
Marginal costing is an accounting principle whereby variable expenditure is evaluated based on the production units, and the fixed cost is attributable to the relevant period in which the production process took place. However, the fixed cost is written off once the contribution of that period is achieved. We can say that marginal costing uncovers the effects of marginal cost which impacts the changes in profits volume and also the quality of output through highlighting the differences between variable costs and fixed costs (Laitinen, 2014) . Through the marginal costing process, costs are classified as either fixed or variable costs. The reason is that marginal costing is formulated using the behaviors of costing that differ with the volume of output. Hence, marginal costing can also refer to as a variable costing since only variable costs are gathered, and the production costs per unit are determined based on the variable costs. However, in a business setup, marginal costing is used interchangeably with direct costing.
As a form of managerial accounting, marginal costing is evaluated based on the distinction of the marginal cost incurred while producing goods and services and the fixed costs which is constant over a given period regardless activity levels. The cost of products and services in marginal costing is, therefore, the variable cost used in the production (Lakmal, 2014) . Variable costs, in this case, include all the costs associated with the direct materials, direct labor, and variable overheads. In this regard, cost per unit is treated as similar with the marginal cost of making an additional unit of good or service because it is based on the idea that production cost of a product is measured using its variable cost.
Marginal costing assumes that fixed costs are fixed regardless of which managerial decision that the company will undertake. As such, it is clear to the production managers that the costs associated with the production are simply the marginal cost of the process (Weygandt, Kimmel & Kieso, 2016) . Fixed costs are ignored during the process, and one advantage it has to the management is it makes it easier to apply the concept of marginal costing thus making it more reliable because it is easier to price out all the production variables. In a business entity, there is no need to apply a cost accounting method which applies fixed costs to different products as it will complicate the pricing decision of the products.
As a result, fixed costs in managerial costing accounts as something against which contribution margin is accounted for. In this regard, the difference between revenues and variable costs contributes to the fixed costs associated with the production of good or service (Stickney & Weil, 2015) . On that note, an organization has to make good pricing decisions that will cover all the fixed costs. However, if the contribution margin is lower than the fixed costs, the firm will likely make losses since the pricing policy cannot cover all the production costs associated with the product; thus, the company needs to address the issue.
In this regard, marginal costing is a basic tool for decision making. For example, an organization can apply its insights when accepting an order, defining the appropriate product mix or when launching a new product in the market. The concept of marginal costing mainly focuses on the financial obligations of the company since the goal of the company is to maximize profits (Beattie, 2014) . However, the management should not consider the contribution of a product as the only factor in the decision-making process. It also has to pay attention to other critical factors such as consumer opinions and competition since it will also affect the pricing of the product. Therefore. The management should consider both the long term and short term financial factors that will ensure a profitable enterprise.
Overall, marginal costing is beneficial to use within the business because it is easier to use. It also accepts the concept that fixed cost is fixed regardless of the time of application. In the system, product margins can be increased by lowering all the variable cost or increasing the price of the commodity. Thus, it allows the manager to pay less attention to the fixed costs and ensure that they optimize in their production process. However, the assumption that fixed cost will remain constant during the production cycle is only correct up to a certain level of production. Some fixed costs vary according to the production period (Laitinen, 2014) . For example, employees’ wages may go up due to changes in the payments rates. Thus, the wages, which are a fixed cost, will arise concerning the rising payment rates.
Differential Costing
Differential costing takes into account changes in the cost structure as a result of the increase or decrease in the level of output, changes in sales volume, and change in product mix. Therefore, an organization will incur differential costs as a result of a change in the course of action. Cost is an essential element for the business, especially in decision making. It is, therefore, critical for the management to have a grasp of certain concepts of differential costing because their every decision they make will involve choosing between the several available alternatives (Weygandt, Kimmel & Kieso, 2016) . Unlike the marginal costing which considers the variable costs used in the production system and ignores the fixed costs, differential costing will have alternatives whose costs and benefits will be compared against the gains and losses available to the other options. The margin between the costs of any two options is what is considered differential costing.
It is a cost accounting tool that shows the difference in expenditure, which is as a result of taking different levels of activity, such as the production of an additional one hundred units of a product. The management uses the concept of differential costing in making decisions on which alternatives to pursue based on their cost and profitability. Nonetheless, if an alternative is not profitable to the business, the company will not pursue it. For example, a company will apply the concept in step-costing situations, which requires an additional unit of output, thus leading to an additional increase in the cost of production.
Unlike in the marginal costing which differentiates between the variable and fixed costs, differential costing can either be fixed, variable or a combination of the two. There are no distinct differences between these types of costs since it puts more emphasis on the gross difference between the production costs of alternatives. As a result, there is no accounting for the differential costing in the books of account since the management primarily considers it during the decision-making process (Stickney & Weil, 2015) . To illustrate the concept, suppose that the management is thinking about changing the product mix and the distribution process to its customers. The company will, therefore, evaluate the costs and revenues and compare them with the projected costs and revenue. If the projected changes have a cheaper and more profitable to the business, then the management will decide on adopting the new system. Similarly, if the alternative is proved to be too much expensive for the company compared with the current system, the company will not pursue the course.
Variances between Differential and Marginal Costing
Both are accounting tools that are very critical in an organization. For instance, the management has to consider all the elements as illustrated in the two accounting principles while making a major decision to the company. In this regard, all the products that the company undertakes consider both the differential analysis between all the available alternatives and the marginal cost of producing an additional unit (Lakmal, 2014) . Therefore, the two concepts are critical in determining the financial success of the business. Regardless of which product or service the company is producing, that accounting of the two principles will determine the likely cost that the firm will incur as a result of certain decisions. Thus, managers need to consider the impacts that marginal costing and differential costing has on the business.
However, there notable differences which applies between the two accounting techniques. For instance, in differential cost analysis, the management will consider the changes which will take place as a result of an increase or decrease in the level of output. Therefore, they will consider the most appropriate course of action that will be efficient and cost-effective in their production system (Beattie, 2014) . As part of determining the most suitable alternative to use, the company will calculate differential costs based on the total and absorption costing techniques. Hence, they will sum up all the cost of an alternative without differentiating, whether they are fixed or variable costs. In this case, the difference in terms of the costs of other options will be considered the differential cost.
In the marginal cost analysis, the cost of an enterprise will be determined based on the variable expenses, whereas fixed costs are ignored. Hence, all the product variable costs are the essential part that will be considered to play a key role in determining how the management will price the product once it is rolled out in the market (Laitinen, 2014) . Unlike the differential costing, where the company will consider all the available alternatives, marginal costing will consider the specific course identified by the company. The fixed cost will not be considered during the application process of the company. For instance, if the implementation process will not have to incur extra fixed prices, all the changes in the variable expenses will be treated as a differential cost, and hence, there will be no difference between differential costs and marginal cost.
Another notable difference between the two accounting principles is; marginal costing is used by the company while making decisions whether to increase or decrease the level of output. In this regard, the management will consider all the cost that will be incurred in case there is an additional increase in the levels of production. However. If the costs associated with the new unit is higher than the price of the product, the management will opt against having the other unit. However, if an additional group results in more profits, it will consider investing in the additional unit.
All in all, the management will use marginal costing while making short term production decisions (Lakmal, 2014) . Nonetheless, differential costing will be applied when the administration wants to make a long term production decision. Thus it will be used to evaluate the effects of two or more alternatives that the company can invest in. The most efficient option is considered and implemented by the company. The two techniques are essential in making decisions in the firm.
Conclusion
In my opinion, both marginal and differential costing is critical to the business. Each has a specific role to play, especially in the decision-making process of the company. Managers, on the other hand, cannot ignore the impacts that these accounting tools have especially on the financial factors of the company. It is essential for the managers to consider both the marginal cost of production and also the differential cost of the product to make informed choices that are profitable to the company. Through accounting techniques, the company will be able to measure, identify, and analyze the financial information based on their production capacity. It will also help the company in predicting future prices of their product based on the cost patterns. Therefore, cost accounting is an integral part of any business operation.
References
Beattie, V., (2014). Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods, and a research framework. The British Accounting Review , 46 (2), 111-134. doi: 10.1016/j.bar.2014.05.001
Laitinen, E., (2014). Influence of cost accounting change on the performance of manufacturing firms. Advances In Accounting , 30 (1), 230-240. doi: 10.1016/j.adiac.2014.03.003
Lakmal, D., (2014). Cost Analysis for Decision Making and Control: Marginal Costing versus Absorption Costing. SSRN Electronic Journal , 4 (2), 27-45. doi: 10.2139/ssrn.2417024
Stickney, C., & Weil, R., (2015). Financial accounting . Mason, Ohio: Thomson/South-Western.
Weygandt, J., Kimmel, P., & Kieso, D., (2016). Accounting Principles . London: John Wiley & Sons.
