Relevant Costing & Decision Making – Characteristics, Examples & Important Business Decisions
🔹 What is Relevant Costing?
➤ Relevant Costs = Costs that change with decision alternatives.
➤ These are future-focused, not based on past data.
➤ Also called Decision Costs or Differential Costs.
🧠 Key Idea:
Only those costs are relevant that change due to the choice of one alternative over another.
📌 Example:
An engineering graduate can either:
1️⃣ Start a workshop
2️⃣ Continue studies
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📚 Relevant costs for studying: Fees, books
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🏠 Irrelevant costs: Clothes, housing (remain same in both cases)
🔹 Characteristics of Relevant Costs
✔ Only future costs
✔ Must differ between alternatives
✔ Can include variable or fixed costs if they change with decision
✔ Do not include sunk or past costs
🔹 Differential Costs (Net Relevant Cost)
➤ The difference in total cost between two decision alternatives.
➤ Can be fixed or variable, if they change due to the decision.
📌 Example:
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Option A Cost = ₹10,000
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Option B Cost = ₹12,000
🧮 Differential Cost = ₹2,000
🧠 Important Notes:
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Not calculated per unit, but as total cost difference
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Only relevant to the current decision
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Influenced by non-cost factors too (e.g. govt. policies, employee behavior, social impact)
🔹 Steps in Decision Making
1️⃣ Identify the Problem
2️⃣ List Available Alternatives
3️⃣ Evaluate Alternatives (Use cost-benefit & differential cost analysis)
4️⃣ Choose the Most Profitable Option
🔹 Important Business Decisions Based on Relevant Costs
| Decision Type | Purpose |
|---|---|
| 1. Selling Price Decisions | To decide competitive & profitable pricing |
| 2. Exploring New Markets | Whether entering a new market is profitable |
| 3. Make or Buy | Whether to manufacture or outsource |
| 4. Expand or Contract | Whether to scale operations or reduce |
| 5. Sales Mix Decisions | Best combination of products to maximize profit |
| 6. Alternative Production Methods | Choosing between different manufacturing techniques |
| 7. Plant Shutdown Decisions | Whether to temporarily or permanently close a plant |
| 8. Acceptance of Special Order | Should a one-time special order be accepted below usual price? |
| 9. Add or Drop Product Line | Whether to introduce a new product or discontinue an existing one |
| 10. Replace Machinery | When is it beneficial to replace old machines? |
🔻 Irrelevant Costs (Opposite of Relevant Costs)
➤ Costs that do not change with decisions
➤ Usually include fixed costs that remain constant in short term
➤ Example: Rent, salaries (in most cases)