Incremental or differential costs are called relevant costs in decision making.

Meaning of incremental/differential cost

Incremental (or differential) cost is the increase or decrease in total cost that results from choosing one alternative over another, such as producing extra units or adding/dropping a product line. Only the costs that change between the alternatives are included; costs that stay the same regardless of the choice are ignored.

Why they are “relevant” costs

These costs are described as relevant because they are directly affected by the specific decision being made and therefore should influence that decision. Focusing on relevant (incremental/differential) costs helps managers compare options properly and avoid being misled by sunk or unchanged fixed costs.

Relation to common decisions

Incremental or differential (relevant) costs are used in decisions such as make-or-buy, special orders, product mix, adding or dropping a product or segment, and expanding or reducing capacity. In each case, management compares only the costs and revenues that will differ between the alternatives to choose the most profitable option.