Relevant Cost

The term "relevant cost" is used in accounting and economics to refer to the costs that are relevant to a particular decision. In other words, relevant costs are those costs that will be incurred or saved as a result of making a particular decision.

For example, if a company is considering whether to purchase a new machine, the relevant costs would include the cost of the machine, the cost of operating the machine, and the cost of any lost sales that would result from the purchase of the machine. The cost of the machine itself is a relevant cost because it will be incurred regardless of whether or not the company purchases the machine. The cost of operating the machine is also a relevant cost because it will be incurred if the company purchases the machine. The cost of lost sales is a relevant cost because it will be incurred if the company does not purchase the machine.

On the other hand, the cost of the old machine is not a relevant cost because it will not be incurred regardless of whether or not the company purchases the new machine. The cost of the land on which the machine will be located is not a relevant cost because it will not be incurred if the company does not purchase the machine. The cost of the labor to install the machine is not a relevant cost because it will not be incurred if the company does not purchase the machine.

The concept of relevant costs is important because it helps managers make better decisions. By focusing on the costs that are relevant to a particular decision, managers can make decisions that are more likely to be in the best interests of the company.

In addition to the costs that are directly incurred or saved as a result of a decision, there are also other costs that may be relevant to a decision. These costs are known as opportunity costs. An opportunity cost is the cost of the next best alternative that is forgone when a particular decision is made.

For example, if a company is considering whether to purchase a new machine, the opportunity cost of purchasing the machine would be the profit that could be earned by investing the money in another project. The opportunity cost of not purchasing the machine would be the cost of the lost sales that would result from not having the machine.

The concept of opportunity costs is important because it helps managers to understand the full cost of a decision. By considering the opportunity costs of a decision, managers can make decisions that are more likely to be in the best interests of the company.

In conclusion, the term "relevant cost" is used in accounting and economics to refer to the costs that are relevant to a particular decision. Relevant costs are those costs that will be incurred or saved as a result of making a particular decision. The concept of relevant costs is important because it helps managers make better decisions. By focusing on the costs that are relevant to a particular decision, managers can make decisions that are more likely to be in the best interests of the company.