## What is relevant cost & Briefly discuss the characteristics of relevant cost ?

Relevant costs are those costs that will make a difference in a decision. Sunk costs are never

relevant. Future costs may or may not be relevant. If the future costs are going to be incurred regardless of the decision that is made, those costs are not relevant. The only costs that are relevant are those that differ as between the alternatives being considered. Characteristics Relevant cost is a cost that will be incurred in the future. Historical costs are sunk costs which has no relevancy in the decision making. The costs must differ between alternatives. If a cost is the same whether we choose alternative A or B then this is an irrelevant cost. A good example is factory rental which remains the same irrespective of management wanting to manufacture product A or B. Only CASH flow item And Incremental fixed costs are relevant. Non cash item like depreciation and absorbed fixed overheads are not relevant costs as they do not involve any additional cash flow.

## what is Margin of safety ? Why it is a useful concept for management ?

In break-even analysis, margin of safety is the extent by which actual or projected sales exceed the break-even sales. It may be calculated simply as the difference between actual or projected sales and the break-even sales. However, it is best to calculate margin of safety in the form of a ratio. Thus we have the following two formulas to calculate margin of safety:

MOS = Budgeted Sales Break-even Sales Budgeted Sales Break-even Sales MOS = Budgeted Sales Margin of Safety: It helps the management to estimate that how much their estimated sales can be reduced to even achieve some kind of profit from production and sales or how much costs can increase to even then company at profit point and can survive loss position.