What is an Incremental Cost?

An Incremental Cost is a cost resulting from additional expenses associated with the production of an additional unit or product. Incremental Cost is also called marginal cost, it reflects changes that occur to the balance sheet of a company as a result of an addition to the unit of production. When a company produces one more unit of a product, the costs associated with this production are Incremental cost. An Incremental cost is important in managerial accounting, it is also useful when fixing the prices of goods and services.

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How is Incremental Cost or Marginal Cost Used?

Incremental Cost is otherwise called a marginal cost, it is an important cost that helps businesses decide between the production of two products. It is also helpful in making decisions as to whether producing a good is cheaper than buying it elsewhere and vice versa. The incremental cost is also useful in the analysis of the profitability of business segments. Incremental cost analysis does not include fixed costs, rather, it is the cost associated with the production of an additional unit of product. Here are some things to know about Incremental cost;

• The incremental cost is the amount of money or cost a company will incur when an additional unit of product is produced.
• Incremental cost analysis is important in managerial accounting.
• This cost helps in determining how profitable the segments of a business are.
• When Incremental costs exceed Incremental revenue, a company will be in loss.

Related Topics

• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Marginal Cost
• Incremental Cost
• Average Total Cost
• Opportunity Cost
• Opportunity Set
• Sunk Costs
• Cost Curves
• True Cost Economics
• Absolute Advantage