Incremental cost, also called marginal cost, is the cost to produce one additional unit beyond the planned production level. Do not confuse incremental cost with average cost. The average cost per unit for a production run is not the same as the incremental cost for an additional unit. Since production costs include fixed costs and variable costs, the average cost per unit would include both fixed and variable components.
Incremental Cost vs. Average Cost
The incremental cost is typically made up of only the variable costs needed to produce an additional unit. Fixed costs have already been calculated and applied to the regular production run, so those costs would not get applied to additional units beyond the regular production run. To calculate the incremental cost, simply add all costs related to producing just one more unit. These costs might include employee wages for extra time needed and materials used to produce the unit.