Relevant cost
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A relevant cost (also called avoidable cost or differential cost)[1] is a cost that differs between alternatives being considered.[2] In order for a cost to be a relevant cost it must be:
- Future
- Cash Flow
- Incremental
It is often important for businesses to distinguish between relevant and irrelevant costs when analyzing alternatives because erroneously considering irrelevant costs can lead to unsound business decisions.[1] Also, ignoring irrelevant data in analysis can save time and effort.
Types of irrelevant costs are:[3]
- Sunk costs[4]
- Committed costs
- Notional or Non cash costs (e.g depreciation and amortization)