Relevant cost – What is it, definition and concept

A relevant cost is that type of cost whose modification or alteration affects the total cost set. These changes arise from the manager’s decision making.

In the accounting and economic sphere, the concept of relevant cost acquires an important role in decision-making or the design of strategies.

The relevant costs indicate to the manager which alternatives imply increases or decreases in the set of costs of a particular project.

From the accounting point of view, they help to relate a certain decision by the company’s management to the best possible economic result.

Given the accounting circumstances of the company, they determine numerically what decision entails the objective cost to be efficiently satisfied.

Importance of relevant cost

If decision-making is taken into account, the relevant costs vary depending on the option chosen. That is, they are influenced by the attitude of the individual or organization that decides.

In this sense, relevant costs are very taken into account when evaluating projects that involve significant changes.

These can be the hiring of a particular machinery or the design of a qualified staff instead of outsourcing it.

Main features of a relevant cost

Faced with the alternative of irrelevant costs, a relevant cost has a series of defining characteristics to highlight:

  • Influential management: The taking of one or the other decision influences or has relevance on the cost. If, given the existence of alternatives, a particular cost is not altered, it is not relevant.
  • Perspective: The decision may change in the future due to possible alternative or strategy changes. This means that a cost can never change from relevant to irrelevant.
  • Indicative factor: Relevant costs are a red flag or indication of poor decisions or adequate accounting strategies.
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Another way to define these types of costs is as spreads. They are in contrast to the so-called irrelevant costs or sunk costs.

Relevant cost example

A common example of a relevant cost is the salary to be paid in projects that incorporate new technology or machinery.

Faced with technological improvements, the workforce must be more trained for its control and management. This fact means that the professional category of employees must be higher than that of a staff that did not have to manage these improvements.

Therefore, the salaries of a company are considered relevant costs, since the decision to improve equipment translates into an increase in total costs through increased salaries.

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