RELEVANT COSTS FOR NON-ROUTINE DECISIONS

A relevant cost is a cost that is appropriate to a specific management decision. To be relevant, a cost should be:

1) Future cost – A decision is usually about the future & management not what has already been done. A cost that has already been incurred is therefore irrelevant to any decision being made now e.g. costs already paid or costs committed by decisions made in the past.

2) Relevant costs are cash flows–It is assumed that decisions are taken which would maximize the satisfaction of the company owners & therefore such decisions must not be ignored. Such costs include depreciation, notional rent or notional interest or absorbed O/H.

3) Relevant costs arise as a direct consequence of making a decision. It must be an incremental cost i.e. the difference between the cost with the decision & the cost without the decision.