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Relevant costs and Opportunity costs - a discussion

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Discuss the concept of relevant cost for decision making, incorporating both quantitative and qualitative data concepts into the relevancy discussion. Indicate if and how opportunity costs should be considered in this decision-making process.

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The solution discusses the concept of relevant costs for decision making and also explains how opportunity costs must be considered in the decision making process.

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Relevant costs are those costs that are decision-specific to the management. These costs are avoidable and will be incurred only if the project is undertaken. This is why these avoidable or differential costs are relevant. Relevant costs are expected future costs. To be considered relevant, costs must occur in the future and differ among the alternative course of action. Costs that are not relevant are said to be irrelevant.

For example, to undertake an investment project, the capital expenditure towards purchase of assets like machinery or equipment is relevant. Also, the annual maintenance charges, labor expenses and other expenses of the project as well as the ...

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Radhika Lakshmi, MPhil
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  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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