Chapter 11, Problem 1Q

What is a relevant cost?

To determine

Determination of relevant cost describes the concept of relevant concept in decision making. The relevant cost is the cost which has the impact of change with the implementation of decision.

To Discuss:

The concept of relevant cost

Answer to Problem 1Q

Solution:

The relevant cost is the cost which has a behavior of change with the change in decision in making. It refers to incremental cash outflows to be incurred as a result of decision implementation, opportunity cost to be foregone for implementing the decision and the cost avoided with the implementation of decision.

Explanation of Solution

The Relevant cost in the decision making is a cost which has the relevance while taking up the decision. These are referred as all those cost which has the impact of change (whether increase or decrease) with the implementation of decisions taken. These are referred as following cost:

1. Cash outflows need to be undertaken for implementing any project/ decision is the relevant cost for the project/ decision.
2. If the decision is to choose between the alternatives, then the relevant is the incremental cost to be incurred in a particular alternative than the cost incurred in other alternative.
3. The Relevant cost also includes the opportunity cost of the next best alternative. The opportunity cost is the amount of revenue/ income generated from present project, which has to be sacrificed for undertaking the new opportunity.
4. The relevant cost is the cost which can be avoided if the decisions taken.

In other words, all those factors which have the impact of change in the cost shall be regarded as relevant and its cost shall be treated as relevant cost.

Conclusion

To conclude, it can be said that the relevant cost is the cost which changes with the decision making and measuring these cost will have an impact on decision making.