What is Cost Concept for Decision Making?

Cost concept are relevant in business operation because it can make different decisions and
provide alternatives that may serve as an option as a course of action.

Relevant Cost

Relevant cost are costs which are relevant to a decision. A matter is relevant if it affects the cash
flow affected by a decision.

Which are relevant costs and which aren’t?

Relevant

 Increase or Decrease in cash flows caused by projects are relevant

 Revenues foregone because of a decision are relevant

Irrelevant

 Sunk cost or Past cost are irrelevant

 Re-apportionment of existing fixed cost are irrelevant
 Depreciation and Book values are irrelevant

Identifying Relevant Costs

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

Relevant Cost Analysis: A Two-Step Process

Step 1: Eliminate costs and benefits that do not differ between alternatives.

Step 2: Use the remaining costs and benefits that do differ between alternatives in making the
decision. The costs that remain are the differential, or avoidable, costs.
Reference:

https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/relevant-costs.html#:~:text=%27Relevant%20costs%27%20can%20be
%20defined,amounts%20that%20must%20be%20paid

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