Flute head, G54 is OK for a tool length offset, but not a tool diameter offset.
If you use Autocad you already know what incremental mode is: In Autocad it is called relative Cartesian coordinates;
Absolute means all dimensions are given from 0,0 (home)
Incremental means dimensions are given from the last point.
Cutter compensation: What you are calling tool offset (diameter)
What you do here is draw your part in Autocad. You have to decide which way you are going to cut the part. Is the cutter going to be going clockwise around the part perimeter on the left side of the part, or is it going counterclockwise around the part on the right side of the part.
This is cutter comp right G42 or cutter comp left G41
Cutter comp off is G40.
You would use cutter comp for a few reasons.
1. Let's say you normally use a 1/2" dia router bit to cut out your parts. You break your last bit and you only have 3/8" dia bits. If you programmed using cutter comp, you simply have to enter the diameter of the bit in a table and the program adjusts itself. Without cutter comp, you have to rewrite the entire program.
2. You have a high volume shop and you send out router bits for resharpening. When they come back, they are slightly small in diameter. Cutter comp allows you to keep your finished parts to perfect size.
G54 is used for fixture offsets on your router bed. Its like setting up a UCS in Autocad. You can have more than 1. They are named, G54, G55, G56, etc. But you can use these for tool length offsets if you need them.
Alot of people cannot imagine programming without G41/G42 cutter comp. Other people cannot imagine why you would need to. I use it at work religiously, but at home I never need it.
Here's a site with a good program to help you learn all this stuff
http://www.cnczone.com.com/autonc.htm