I use the terms differential cost and incremental cost interchangeably. In other words, I believe the terms mean the same thing: the difference in cost between two alternatives. For example, if a company determined that the annual cost of operating at 80,000 machine hours was $4,000,000 while the annual cost of operating at 70,000 machine hours was $3,800,000, then the differential cost or incremental cost of the additional 10,000 machine hours was $200,000.

The term marginal cost refers to the cost of operating for one additional machine hour.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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