Definition: The Incremental Cost refers to the additional cost that a company incurs in undertaking certain actions such as expanding the level of production or adding a new variety of product to the product line, etc.
The concept of incremental cost is quite similar to the concept of marginal cost, but with a relatively wider connotation. The marginal cost refers to the addition in the total cost due to the production of one more unit of a product, generally the next unit. But the incremental costs refers to the total additional cost incurred in taking a certain action, for example, changing the production level, not necessarily producing the next unit of a product but instead any ‘nth’ unit of a product.
The incremental cost is more realistic as it is based on the fact that due to the lack of divisibility of the inputs it is not possible to use separate factors for each unit of output. Besides, in the long where firm expands its production hires more manpower, material, machine and equipment, the expenditure incurred on these factors are the incremental cost and not the marginal cost.
The firm incurs the incremental cost when it undertakes any of the activities: changing the product line, introducing a new product, replacing obsolete machinery or equipment, replacing the old methods of production with the new one, etc.