Relevant and irrelevant costs

Introduction 

Relevant costing refers to costs specific to management decisions. Relevant costing is typically used for the purpose of decision making.

A relevant cost may include:

  • Future Costs – decisions are made for the future.  Decisions made now cannot alter the past.  Cost (also known as sunk cost) incurred in the past are irrelevant to any decision being made now. Note Costs incurred include those costs which may have been agreed by contract but which have not yet been paid or received.
  • Incremental Costs – A relevant cost is one which arises as a direct consequence of a decision.  Only costs which will differ under some or all of the available opportunities should be considered.  Relevant costs are therefore often referred to as incremental costs.

If an employee turns up for work and is unable to do his job for some reason, he will be paid his normal basic wage.  If while he is there he is given a different job that earns £40, the net gain is deemed to be £40 as the basic wage is irrelevant.