How are costs categorized in incremental analysis?

In incremental analysis, costs are categorized based on their relevance to a specific decision. This approach focuses on identifying the costs and benefits that will directly change as a result of making a particular decision. The emphasis is on future costs and revenues that will be affected by the decision at hand, rather than historical or irrelevant costs.

This method helps decision-makers to concentrate their analysis on the factors that will actually impact the outcome of the decision, ensuring that only those costs and benefits that will vary with the decision are considered. By analyzing relevant costs, businesses can optimize their decisions, aiming for the best financial outcome while ignoring sunk costs and irrelevant information that do not affect current choices.