What Do You Mean By Relevant Cost?

What exactly is a cost driver?

A cost driver is the unit of an activity that causes the change in activity’s cost.

Activity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product.

The cost drivers thus are the link between the activities and the cost..

Is direct labor a relevant cost?

When existing labor is already being fully utilized, any additional labor requirement may be met either by offering overtime to current staff or by hiring new employees. The relevant cost of direct labor in this scenario shall be the total cost of additional labor hours required for the proposed business action.

What is relevant cost example?

Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. … As an example, relevant cost is used to determine whether to sell or keep a business unit.

What is relevant cost for decision making?

A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process. … The reverse of a relevant cost is a sunk cost.

Are all future costs relevant?

The costs which should be used for decision making are often referred to as “relevant costs”. … a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.

Is fixed cost a relevant cost?

Generally speaking, most variable costs are relevant because they depend on which alternative is selected. Fixed costs are irrelevant assuming that the decision at hand does not involve doing anything that would change these stationary costs.

What is relevant and irrelevant cost?

Relevant costs are costs that will be affected by a managerial decision. Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.

How do we determine if a cost or revenue is relevant?

In cost accounting, relevant means that you consider future revenue and expenses. Also, relevant means that a cost or revenue will change, depending on a decision you make. Past costs are water under the bridge, and if the costs or revenue remain the same no matter what you decide, they aren’t relevant.

What’s the difference between relevant and irrelevant?

The difference between Irrelevant and Relevant When used as adjectives, irrelevant means not related, not applicable, unimportant, not connected, whereas relevant means directly related, connected, or pertinent to a topic. Irrelevant as an adjective: Not related, not applicable, unimportant, not connected.

What is the difference between relevant and sunk costs?

A sunk cost is a cost that has been incurred and cannot be recovered. … When a manager is considering a particular decision, relevant costs are the costs that are incurred if the decision is made and irrelevant costs are the costs that are incurred whether or not the decision is made.

What are the two properties of a relevant cost?

Two important characteristic features of relevant costs are ‘Occurrence in Future’ and ‘Different for Different Alternatives’. This does not mean that all costs which occur in future are not relevant cost.

What is the meaning of relevant?

relevant, germane, material, pertinent, apposite, applicable, apropos mean relating to or bearing upon the matter in hand. relevant implies a traceable, significant, logical connection.

Is salary a relevant cost?

Relevant costs are those costs that will make a difference in a decision. Relevant costs are future costs that will differ among alternatives. … The salaries of the product line managers and other employees whose salaries will be eliminated are relevant to the decision.

What are the features of relevant cost?

The first feature is that it they are future oriented. That means that a relevant cost is one that we will incur in the future as a direct result of a management decision. The next feature relates to cash. Relevant costs are cash transactions rather than accounting or paper transactions.

Are avoidable costs relevant?

A relevant cost is a cost that differs between alternatives. An avoidable cost can be eliminated, in whole or in part, , p , by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Is opportunity cost relevant for decision making?

An opportunity cost is a hypothetical cost incurred by selecting one alternative over the next best available alternative. Opportunity costs are relevant in business decision making. In addition, companies commonly use them when evaluating corporate projects.

What is imputed cost with example?

Imputed cost is the cost incurred during the period when an asset is employed for a particular use, rather than redirecting the asset to a different use. This amount is the incremental difference between the two options. For example, a teacher decides to go back to school to earn a master’s degree.

How do you calculate relevant cost?

Subtract the total variable cost from the total cost. For example; $16,000 minus $30,000 equals $14,000. This is the fixed cost in every month. To calculate estimated costs in a future month, multiply the estimated production or unit usage by the variable cost, then add the fixed cost.

How do you find the relevant cost of materials?

The relevant cost will be the market price plus any transportation which brings the material to use. If the material is available but not in regular usage, the relevant cost will be the higher of: Scrape value and. Its alternative usage.

Is scrap value a relevant cost?

Relevant cost is the scrap value as the strings have no value in alternative use. The past cost of $10 per string set is a sunk cost and therefore not relevant.

Is fixed overhead a relevant cost?

Differential, avoidable, and opportunity costs are considered relevant costs. Sunk and fixed overhead costs are irrelevant. Using examples to demonstrate these costs show us that which costs are included in what places depend on what decision is made and the specific situation.