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Definition of Relevant cost:
- Differential or quantifiable future cost that must be considered in making a particular decision.
- Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process. As an example, relevant cost is used to determine whether to sell or keep a business unit. The opposite of a relevant cost is a sunk cost, which has already been incurred regardless of the outcome of the current decision.
- Assume, for example, a passenger rushes up to the ticket counter to purchase a ticket for a flight that is leaving in 25 minutes. The airline needs to consider the relevant costs to make a decision about the ticket price. Almost all of the costs related to adding the extra passenger have already been incurred, including the plane fuel, airport gate fee, and the salary and benefits for the entire plane’s crew. Because these costs have already been incurred, they are sunk costs or irrelevant costs. The only additional cost is the labor to load the passenger’s luggage and any food that is served mid-flight, so the airline bases the last-minute ticket pricing decision on just a few small costs.
- Cost or expense attributable or chargeable to one or more activities on the basis of benefits received or some other logical relationship.
How to use Relevant cost in a sentence?
- I can certainly cover the cost of my daughters soccer camp; but when considering the relevant cost s such as fuel, food, and equipment, the camp does not seem as affordable.
- You need to factor in all of the relevant cost when you are trying to figure out if something is worth purchasing.
- Relevant costs are only the costs that will be affected by the specific management decision being considered.
- I asked him what the relevant cost was and he looked at me utterly confused because he did not know.
- Management uses relevant costs in decision making, such as whether to close a business unit, whether to make or buy parts or labor, and whether to accept a customer’s last minute or special orders.
- The opposite of a relevant cost is a sunk cost.