What are the relevant costs for decision making?
A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process.Click to see full answer. Similarly one may ask, are all future costs…
A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process.Click to see full answer. Similarly one may ask, are all future costs are relevant in decision making?To explain: The agreement or disagreement over the statement “All future costs are relevant in the decision making”. If the future cost results in cash inflow or cash outflow over and above its current level, then it would be considered as relevant.One may also ask, what are the characteristics of relevant cost? FEATURES or CRITERIA of Relevant Costs: Relevant cost is a cost that will be incurred in the future. Historical costs are sunk costs which has no relevancy in the decision making. The costs must differ between alternatives. Only CASH flow item And Incremental fixed costs are relevant. Similarly, you may ask, what kind of costs are irrelevant when making decisions? Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided. There is no correct answer for each business, it will often alter per situation.Can fixed costs be relevant?Fixed costs are only relevant in decision making in two cases: If fixed costs are going to change as a result of the decision. If finance rules within your company require that all products carry some level of fixed cost allocation.
