An incremental cost (or revenue) is the additional cost (or revenue) that results from a specific decision — usually a discrete step change in the operation. Adding an overtime shift, opening a new branch, buying a second machine: each generates incremental cost and possibly incremental revenue. Subtracting one from the other gives the incremental profit of that decision.
Incremental costs are not the same as variable costs. Variable costs scale smoothly with quantity (2 per widget, …). Incremental costs are tied to a step — a discrete change in scope. A new shift adds payroll for the whole shift’s workers whether they make 100 widgets or 200; the incremental cost is the shift’s payroll, the variable cost on top of that is the per-widget material spend.
The pattern most useful in engineering decisions: when comparing two alternatives, only the incremental differences matter. Costs that are the same under both alternatives wash out. This is the same principle that lets you ignore sunk costs (they’re the same — already paid — under every future decision).
In project comparison, the related idea is incremental investment analysis for ME projects under the IRR method: don’t pick the project with the highest IRR; instead, look at the IRR of the incremental cash flows between the two best candidates and check whether that incremental IRR clears the MARR. See Internal rate of return for the procedure.
See Variable cost, Sunk cost, Opportunity cost for the surrounding cost taxonomy.