What is the Difference Between Relevant and Irrelevant Cost?
🆚 Go to Comparative Table 🆚The difference between relevant and irrelevant costs lies in their impact on managerial decisions. Here is a breakdown of the two types of costs:
Relevant Costs:
- These are costs that will be affected by a managerial decision.
- Relevant costs can be avoided or adjusted when a business is in the decision-making process.
- They are also known as avoidable, differential, or incremental costs.
- Relevant costs are useful for managers making decisions about the best course of action for the company.
Irrelevant Costs:
- These are costs that will not change in the future when making one decision versus another.
- Irrelevant costs are either positive or negative and are not impacted by a management decision.
- They include sunk costs, committed costs, and fixed overheads, as these cannot be avoided.
- Non-cash items, such as depreciation and amortization, are also considered irrelevant costs.
- Irrelevant costs are not considered in the decision-making process, as they do not contribute to the evaluation of alternatives.
In summary, relevant costs are those that are affected by a managerial decision and are used to evaluate alternatives, while irrelevant costs are not impacted by the decision and are not considered in the evaluation process.
Comparative Table: Relevant vs Irrelevant Cost
The difference between relevant and irrelevant costs can be summarized in the following table:
| Relevant Costs | Irrelevant Costs |
|---|---|
| Affected by a managerial choice in a certain business situation. | Would not be affected by a management decision. |
| Incurred when making business decisions since they affect the decision-making process. | Have already been incurred or are not affected by the decision being made. |
| Examples include future cash flows, avoidable costs, and opportunity costs. | Examples include committed costs, non-cash expenses (depreciation and amortization), and overheads. |
| Relevant costs are considered in decisions regarding shutting down or carrying on a business division, accepting or rejecting a special order, making a product in-house or buying from outside, and selling a semi-finished product or processed one. | Irrelevant costs are not considered in decision-making processes as they do not affect the outcome of the decision. |
Relevant costs are also referred to as differential costs or avoidable costs, while irrelevant costs are sometimes called committed costs. It is essential to understand the difference between relevant and irrelevant costs to make critical decisions in a business, as these costs can either make the company more profitable or put it under financial strain.
- Sunk Cost vs Relevant Cost
- Controllable vs Uncontrollable Cost
- Avoidable vs Unavoidable Cost
- Price vs Cost
- Average Cost vs Marginal Cost
- Cost Benefit vs Cost Effectiveness
- Tangible vs Intangible Cost
- Direct vs Indirect Costs
- Fixed Cost vs Sunk Cost
- Implicit Cost vs Explicit Cost
- Actual Cost vs Standard Cost
- Variable vs Fixed Costs
- Costing vs Budgeting
- Sunk Cost vs Opportunity Cost
- Costing vs Cost Accounting
- Marginal Costing vs Differential Costing
- Opportunity Cost vs Marginal Cost
- Cost vs Expense
- Absolute Cost Advantage vs Comparative Cost Advantage