A increase in cost of one alternative over the cost of another. In other words, it constitutes the change in cost due to change in ongoing business operations. Marginal cost (also called incremental cost) is all about the extra or additional cost that would arise from changes in existing operations, for many reasons including expansion, improvement, etc. Generally speaking, it is the cost added to the existing cost structure by producing/ or delivering one additional unit of a product or service. This cost reflects changes that impact an entity’s statement of income and the balance sheet a result of such an addition.

Marginal costing is a concept mainly used in economics and managerial accounting to imply both an increase or decrease in the total cost of production due to a change in the quantity of output over a given period of time. In calculation, marginal cost is expressed as the change in total production costs (additional costs incurred) divided by the change in the number of units produced. Marginal costs are typically associated with the total cost of production that encompass a variable cost element.

Over an extended period of time, marginal costs will impact the overall cost structure (operational cost) as it becomes an integral part of it.