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What is an incremental cost?

An incremental cost is the increase in total costs resulting from an increase in production or other activity.

For instance, if a company's total costs increase from $320,000 to $360,000 as the result of increasing its machine hours from 8,000 to 10,000, the incremental cost of the 2,000 machine hours is $40,000.

The incremental cost is also referred to as the differential cost. The incremental cost is the relevant cost for making a short run decision between two alternatives.