In relation to differential analysis, it is the difference between the costs of two alternative courses of action/ methods/ choices / business decisions (or more). It constitutes either a decrease or an increase in cost from other business alternatives. Differential cost may also reflect the change in the costs which may result from an increase or decrease in output, change in sales volume, alternative method(s) of production or service, etc. Differential analysis focuses on the future costs and benefits associated with different alternatives. Everything else is considered irrelevant and hence should be disregarded.
Therefore, differential cost (or expense) is defined as the difference between the amounts of relevant costs for two alternatives. It is used as an analytical tool for decision-making based on a comparison between various alternatives in order to choose the less costlier one.
