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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 choice
Relevant cost in decision making process : In business operation, there may be alternative choices of doing things. The management accountant has a great role in the dicision making process of which one out of the alternatives is most profitable, keeping in mind of its technical fasibility. In the planning process of future business operation, these decisions are taken into consideration.
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.
Following two conditions need to be satisfied for a cost to be called a relevant cost:-
1. Occur in the Future - every decision deals with selecting a course of action based on its expected future results
2. Differ among the alternative courses of action - costs and revenues that do not differ will not matter and will have no bearing on the decision being made.
For example, while considering a proposal for plant replacement by discarding the existing plant, the original cost and the present depreciated book value of the old plant are irrelevant as they have no impact on the decision for replacement just going to be taken place. However the expected sales value of the discarded plant is relevant, as it just goes to reduce the amount of investment to be made in the new plant and so it has an influence on the decision. Moreover, outcome of the investment is also taken into consideration for decision making.
