The marginal cost of funds is the additional or incremental cost associated with raising a dollar of new funds. For example, if a share account has balances of $10 million at a current cost of 2%, the annual cost is $200,000. If the rate is raised to 2.5% in an attempt to bring in say, $1 million in new deposits, the incremental dollar cost would be ($11 Million x .025)-$200,000= $75,000. This results in a marginal cost of $75,000/$1 Million=7.5% rather than 2.5%.  Viewed another way, in addition to paying 2.5% for the new deposits of $1 million, or $25,000, the institution is paying .5% more on the existing $10 balances, or $50,000 for a total of $75,000.