Differential cost and incremental cost are two different concepts, though at times they are interchangeably used. The former is defined as a future cost that differs from one alternative to another, while the latter represents an increase in cost of one alternative over the cost of another.

In practice, incremental cost refers to the change in cost due to change in ongoing business operations. Whereas the differential cost implies the cost arising from new or planned business operations/ activities. So, in view of the conceptual difference between the two terms, differential cost relates to a situation where an entity compare two different alternatives or more in terms of the cost to be incurred, with the difference between the higher-cost alternative and the lower-cost alternative being the “differential”. On the other hand, 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.)