If x company
mention these follows reason then it may relevant with decision. Every decision involves a choice from among
at least two alternatives. The costs and benefits of the alternatives should be
compared when making the decision.
1. Identifying relevant costs. A relevant cost or benefit is a cost
or benefit that differs between alternatives. Differential costs are relevant
costs. Any cost or benefit that does not differ between alternatives is
irrelevant and can be ignored in a decision. This is a tremendously powerful
concept that allows us to ignore mounds of data when making decisions since
most things are not affected by any given decision.
a. All sunk
costs (i.e., costs already irrevocably incurred) are irrelevant since they will
be the same for any alternative. All future costs that do not differ between
alternatives are irrelevant.
b. Any cost that
is avoidable is potentially relevant. An avoidable cost is a cost that can be
eliminated (in whole or in part) as a result of choosing one alternative over
another.
c. When making a
decision, eliminate all irrelevant costs. Make the decision based on the remaining,
relevant costs.
2. If irrelevant.
Costs that are relevant in one decision situation are not necessarily relevant
in another. In each situation the manager must examine the data and isolate the
relevant costs.
NOTE: Don't develop
incorrect rules of thumbs for identifying relevant costs. One such popular
thumb-rule is that variable costs are relevant and fixed costs are irrelevant.
This thumb-rule is wrong. The fixed costs that differ between alternatives and
that are therefore relevant.
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