Characteristics of Relevant Cost Assignment Help

Cost Analysis and Decision-making: Production Decisions - Characteristics of Relevant Cost

Characteristics of Relevant Cost

We are already familiar with the concept of relevant costs. Relevant costs are the costs that will make difference when one alternative is selected over the competing alternatives. Essentially, relevant costs have the following two characteristics:

  • They Differ Between Alternatives: If the same costs are incurred for both the alternatives, then they are not relevant. If the costs incurred for the alternatives are different, then they become relevant costs.

  • They are Expected Future Costs: All future costs are not necessarily relevant to decision-making purposes, but no costs are relevant unless they pertain to the future. Expected future costs mean that the costs are expected to occur during the time period covered by the decision. Past or historical costs are relevant to the decision only if they are expected to continue in the future.

For example, if the manager is evaluating the purchase of either a manual or an automated drill press, both of which require skilled labor costing Rs.80 per hour, the labor rate is not relevant since it is the same for both the alternatives. If however, the manual drill press requires only semi-skilled labor at Rs.60 per hour whereas the automatic drill press requires skilled labor at Rs.80 per hour, then the labor rate is relevant because it is different for the two alternatives. The difference between the amounts of the two costs is called differential cost or incremental cost.

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