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Analyzing relevant benefits & costs: how they work

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Please help analyzing relevant costs vs. relevant benefits.

What's the difference and how does each works? And, who uses them?

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Solution Preview

Relevant costs and benefits are those costs and benefits that change between decisions. It is typically incremental benefits/costs and opportunity costs for contemplated actions.

Relevant benefits are usually a bit easier than relevant costs. A relevant benefit is usually a tangible cash flow or profit margin from being able to take a particular action or a cost that will be avoided from a particular action. If you decide to take on a special order, you know the increase in benefits - the price the customer will pay for the special order. Or, if you decide to let a vendor assemble something you used to do yourself, you know what costs will be avoided if you stop assembling.

Relevant (incremental) costs can be as clear but are sometimes harder to figure out. That is, what will the cost in the future be if you buy this equipment? You don't have any history and so this is a big guess. Sure, you might have similar equipment so it ...

Solution Summary

Your tutorial is 544 words and three references and gives the definition and some examples. It explains why these costs can be difficult to determine and why and then explains that nearly everyone uses this for classic business decisions.