What are relevant costs?

Relevant costs are defined as costs that will change based on specific decisions made. These costs are critical in decision-making processes because they directly impact the future financial outcomes of choices an organization might make. For example, if a company is considering whether to accept a special order at a lower price, the costs that will differ as a result of accepting that order (such as variable manufacturing costs) are relevant to the decision process.

In contrast to relevant costs, some costs may not affect the decision at hand. Historical expenditures, for instance, are considered sunk costs and should not influence current decisions since they have already been incurred and cannot be recovered. Additionally, costs that do not affect profit margins or are easily ignored in decision-making are also not relevant to the analysis of future choices. Therefore, understanding which costs are relevant is crucial for effective financial decision-making and optimizing resource allocation.