Relevant costs are those expected future costs which vary under various alternatives. Let’s take an example, in the case of whether to retain or replace an old machine, the realisable value and dismantling cost of the old machine are relevant costs but the present written down value (WDV) of the old machine will be irrelevant.
Two common pitfalls in Relevant Cost Analysis
- The first pitfall is to assume that all variable costs are relevant. All variable costs are not relevant. Variable costs that remain unchanged under various alternatives are not relevant but the variable costs that differ under different alternatives are relevant.
- The second pitfall is to assume that all fixed costs are irrelevant. All fixed costs are not relevant. Fixed costs that remain unchanged under different alternatives are irrelevant but fixed costs which differ under various alternatives are relevant.