Relevant Costs for Decision Making - Assignment Point
Relevant Costs for Decision Making
Subject: Management | Topics:

Relevant Costs for Decision Making:

Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations.

Relevant Cost:

A managerial accounting term that is used to describe costs that are specific to management’s decisions. The concept of relevant costs eliminates unnecessary data that could complicate the decision-making process.

Learning Objective 1

Identify relevant and irrelevant costs and benefits in a decision.

Learning objective number 1 is to identify relevant and irrelevant costs and benefits in a decision.

Cost Concepts for Decision Making:

A relevant cost is a cost that differs between alternatives.

Identifying Relevant Costs

An avoidable cost can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Two broad categories of costs are never relevant in any decision. They include:

ŒSunk costs.
Future costs that do not differ between the alternatives.

An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Two broad categories of costs are never relevant in any decision: 

Relevant Cost Analysis: A Two-Step Process

Eliminate costs and benefits that do not differ between alternatives.

Use the remaining costs and benefits that      differ between alternatives in making the decision.  The costs that remain are the differential, or avoidable, costs.

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Eliminate costs

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