Types of Relevant Costs Types of Non-Relevant Costs

Future Cash Flows Sunk Cost

Cash expense that will be incurred in the future Sunk cost is expenditure which has already been
as a result of a decision is a relevant cost. incurred in the past. Sunk cost is irrelevant
because it does not affect the future cash flows of
a business.

Avoidable Costs Committed Costs

Only those costs are relevant to a decision that Future costs that cannot be avoided are not
can be avoided if the decision is not relevant because they will be incurred irrespective
implemented. of the business decision bieng considered.

Opportunity Costs Non-Cash Expenses

Cash inflow that will be sacrificed as a result of a Non-cash expenses such as depreciation are not
particular management decision is a relevant relevant because they do not affect the cash flows
cost. of a business.

Incremental Cost General Overheads

Where different alternatives are being General and administrative overheads which are
considered, relevant cost is the incremental or not affected by the decisions under consideration
differential cost between the various alternatives should be ignored.
being considered.

Avoidable costs refer to variable costs that can be removed from a business
operation, unlike most fixed costs, which must be paid regardless of the activity
level of a company.
Fixed costs such as overhead are generally not avoidable because they must be
incurred whether a company sells one unit or a thousand units. In reality, variable
costs are not entirely avoidable in a short timeframe. This is because the
company may still be under contract or agreement with workers for direct labor or
a supplier of direct materials. When these agreements expire the company will
be free to drop the costs.
Avoidable Cost- cost na hindi mo maiincurred kapag di mo pinerformed yung
activity . Halimbawa , bumili ka ng supplies, so magkakaroon ka ng supplies
expense these are VC – cost that vary based on production
 Definition of Avoidable Cost: A cost that can be avoided by not producing a particular
good. For example, if you are building cars, an avoidable costs would be the raw
materials.

If you stopped producing a car, you would no longer have to pay for the raw materials
such as steel and aluminium. However, other costs of a firm maybe unavoidable, at
least in the short term. For example, the firm still has the fixed costs such as rent and
paying some safety workers.

Unavoidable costs
some costs which are immune to a decision in the sense that they are incurred regardless a product or
activity is continued or dropped.

the cost has already been incurred and can’t be reimbursed. If yes, the cost is unavoidable.

Example: cost of initial advertisement outlay is unavoidable because it is a onetime cost incurred to
introduce the product and it won’t change even if the product is discontinued. Hence it is an
unavoidable cost.

fixed general and administrative expenses like office rent

Opportunity Costs

It is the opposite of the benefit that would have been gained had an action, not taken, been
taken—the missed opportunity.

If you choose one alternative over another, then the cost of choosing that
alternative becomes your opportunity cost.
Something you must let go, in order to gain something

 Someone gives up going to see a movie to study for a test in order to get a good grade.
The opportunity cost is the cost of the movie and the enjoyment of seeing it.
 If your friend John chooses to quit work for a whole year to go back to school,
the opportunity cost of his decision is the year’s worth of lost wages.

 Out-of-pocket costs are the current year's repairs and maintenance expenses, The purchase of
gasoline, parking, and tolls while engaged in company business
 The cost of a business lunch with a client
 The cost of a reward card given to an employee

If the Joint Cost are already incurred in the split-off point , they are considered sunk cost and irrevelant
 , the current depreciation expense on the church is not an out-of-pocket cost. The current
period's depreciation is also referred to as a noncash expense.
Unavoidable Cost – fixed general factory overhead, and general administrative expense , kapag
yung isang product ay drinopped , yung genral factory overhead it will be reallocated to other
products
Kapag ang isang equipment walang resale value- sunk cost sya

Common Cost - it’sa shared expense of creating a product or providing a service

that can’t be attributed to a single department or user.
Common Cost – general expense that cannot be assigned to specific area

 Sunk Cost – expense na nabayaran na at hindi na pwede pang irefund

 fuel na ginagamit sa mga machine in producing a product , example: Training.
A company spends $20,000 to train its sales staff in the use of new tablet computers, which they
will use to take customer orders. The computers prove to be unreliable, and the sales manager
wants to discontinue their use. The training is a sunk cost, and so should not be considered in
any decision regarding the computers.

 Example: Hiring bonus. A company pays a new recruit $10,000 to join the organization. If the
person proves to be unreliable, the $10,000 payment should be considered a sunk cost when
deciding whether the individual's employment should be terminated.

JOINT COST - joint cost is a cost incurred in a joint process, A joint process is
a production process in which one input yields multiple outputs. Joint costs
are costs that are incurred from buying or producing two products at the same
time.

Example: Petroleum – crude oil, natural gas

JOINT PRODUCT

Examples of join products include:

 Milk – butter, cream, cheese

 Crude oil – fuel, gas, kerosene

If the secondary product has no saleable value, it is

considered spoilage, waste, or scrap.
COMMITTED COST
A committed cost is an investment that a business entity has already made and cannot recover
by any means, as well as obligations already made that the business cannot get out of.
For example, if a company buys a machine for $40,000 and also issues a purchase order to pay
for a maintenance contract for $2,000 in each of the next three years, all $46,000 is a committed
cost, because the company has already bought the machine, and has a legal obligation to pay for
the maintenance. A multi-year property lease agreement is also a committed cost for the full
term of the lease, since it is extremely difficult to terminate a lease agreement.

What Does Qualitative Factor

Mean?
For example, a manager might be considering adding an extra 15-minute
break in the afternoon for employees. The manager looks at what the
advantages and disadvantages are for adding breaks in the afternoon from a
cost and revenue standpoint. This is where qualitative factors are also
considered.

Another morale booster could be giving gifts or bonuses to each employee.

Employee morale is extremely important for all successful companies and
most large companies spend huge sums of money keeping their employees
happy.

Qualitative factors take into account other issues that may influence
outcome of a decision like SWOT analysis (Strength Weakness Opportunities
Threats); Human Resource Management issues like motivation, morale,
retention etc

The only problem is that employee morale is difficult to measure and quantify.
You can’t really measure morale before and after the breaks are initiated.
They are the factors relevant to a decision that are difficult to measure in terms of money.
Qualitative factors may include: (1) effect on employee morale, schedules and other internal
elements; (2) relationships with and commitments to suppliers; (3) effect on present and future
customers; and (4) long-term future effect on profitability. In some decision-making situations,
qualitative aspects are more important than immediate financial benefit from a decision.
Quantitative factors are numerical basis for decision making - break-even
analysis

An incremental cost is the increase in total costs resulting from an increase in production or
other activity.