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Learning Objective 1

Identify relevant and irrelevant costs and benefits in a decision.
Relevant Costs for Decision Making
Chapter 14

© 2012 McGraw-Hill Education (Asia)

Cost Concepts for Decision Making

McGraw‐Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Slide 2

Identifying Relevant Costs
An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs.
Unavoidable costs are irrelevant costs.

A relevant cost is a cost that differs between alternatives.

Two broad categories of costs are never relevant in any decision. They include:



McGraw‐Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Slide 3

Relevant Cost Analysis: A Two-Step Process

Sunk costs.
Future costs that do not differ between the alternatives. McGraw‐Hill Education (Asia)

Costs that are relevant in one decision situation may not be relevant in another context.
Thus, in each decision situation, the manager must examine the data at hand and isolate the relevant costs.

Step 2 Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs.

Garrison, Noreen, Brewer, Cheng & Yuen

Slide 4

Different Costs for Different Purposes

Step 1 Eliminate costs and benefits that do not differ between alternatives.

McGraw‐Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Slide 5

McGraw‐Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Slide 6

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HR4

Identifying Relevant Costs

Identifying Relevant Costs

Cynthia, a Malaysian student studying in Penang, is considering visiting her friend in Kuala Lumpur. She can drive or take the budget airline. By car, it is