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.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns