Differential cost is another name for incremental cost, the difference in total cost between two alternative courses of action. If a decision would raise total costs from $400,000 to $460,000, the differential cost of that decision is $60,000. The main entry gives the formula and a worked special-order example.
How the term is used
Management accounting texts often prefer "differential" because the analysis compares two options side by side and looks only at the items that differ. Costs and revenues that are the same under both choices can be ignored. The difference in revenue is called differential revenue, and comparing the two gives the change in profit from choosing one option over the other.
Differential costs are relevant costs: future costs that change depending on the decision. A sunk cost, already spent and unaffected by the choice, is not a differential cost and should be left out. An opportunity cost, the benefit given up by not taking the next best option, often should be included even though it never appears in the accounts.
The idea is used in decisions such as a make or buy decision, accepting or rejecting a special order, dropping a product line or processing a product further. "Differential" can also describe a cost decrease, in which case it is sometimes called a decremental cost.