Question

1. Provide a 4-5 sentence answer on what is incremental costs and how it differs from variable costs. Not just restating the dictionary definitions.

Answer 1

Incremental costs are the cost which increases from one alternative to another alternative. They are differential costs which increase because of pursuing another alternative. For example, if company wants to accept special order incremental costs will be variable expenses , additional variable expenses like shipping, and any additional fixed cost like special tools, moulds, etc

Variable costs are the cost which directly varies with production and sales. They remain constant at per unit level and change in total only. For example, direct material, Direct Labor, etc. Incremental cost can be variable or fixed cost. As production and sales increases all variable costs are incremental costs. Fixed costs are incremental only when they change due to additional production or sales