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Relevant cost in decision making process: Costs which are relevant for a particular business option, which are not historical cost but future costs to be associated with different inputs and activities related a business process. Actual, current or historical costs may be used for estimating the future costs of each alternative. The contribution approach, coupled with the ability to distinguish between relevant and irrelevant costs will prove to be a boon for the managers in arriving at correct conclusions in the challenging area of decision making.
Opportunity cost concept: The opportunity cost of the value of opportunity foregone is taken into consideration when alternatives are compared. Opportunity Cost is the value of the next best alternative. In other words, it is the opportunity cost lost by diversion of an input factor from one use to another. It is the measure of the benefit of opportunity foregone.
The opportunity cost is helpful to managers in evaluating the various alternatives available when multiple inputs can be employed for multiple uses. These inputs may nevertheless have a cost and this is measured by the sacrifice made by the alternative action in course of choosing another alternatives.
Opportunity cost is a measure of the benefit of opportunity forgone when various alternatives are considered. In other words, it is the cost of sacrifice made by alternative action chosen. For example, opportunity cost of funds invested in business is the interest that could have been earned by investing the funds in bank deposit.
Relevant Cost: Expected future costs which differ for alternative course. It is not essential that all variable costs are relevant and all fixed costs are irrelevant. Fixed, or variable costs that differ for various alternatives are relevant costs. Relevant costs draw our alternation to those elements of cost which are relevant for the decision.
E.g. Direct labour under alternative I – Rs.10/ hour
Direct labour under alternative II – Rs.20/hour
Then, direct labour is relevant cost.
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