DIFFERENTIAL COSTS

Within business decision-making, differential costs hold significant importance by serving as a yardstick
to gauge the potential impact of a particular choice on a company's overall profitability. This cost analysis
empowers managers to arrive at well-informed decisions aimed at maximizing profits while minimizing
expenditures.

Ex.

A company is thinking about launching a new product. They calculate the extra costs of
production and marketing. If the projected additional income from the product exceeds these costs, it's
a smart choice in terms of differential costs.

SUNK COST

Sunk costs are money you've already spent and can't get back. They happen when you invest in
something hoping for rewards. But if things don't go as planned, you're stuck deciding whether to keep
going or stop to avoid more loss.

Ex.

Jen paid 500 pesos for a movie ticket, but then got sick. The 500 pesos is a sunk cost—she can't
get it back. Now she has to decide whether to push herself to go or rest at home. The money spent
won't change, so her choice should focus on how she feels.

OPPORTUNITY COST

Opportunity cost represents the worth of the alternative you pass up when opting for one choice over
another. It's the value of what you're sacrificing by making a decision.

Ex.

Imagine a student has to pick between studying for a test or joining a school event. If they study, they
miss out on the event's fun. If they go to the event, they might miss a better test score. It's about giving
up one thing for another – that's opportunity cost.

IMPUTED COSTS

Imputed costs are like pretending costs. They're used when a company uses something it owns, even if it
didn't pay money for it directly.

Ex.

Imagine a friend borrowing your camera for a project. Imputed costs would be like considering a rental
fee for the camera's use, even if you didn't charge them. It's a way to show the value of what you've
provided.
REPLACEMENT COST

Replacement cost is the money needed to get a new version of something you have if it's lost or
damaged. It's used in insurance and accounting to figure out the cost of replacing things..

Ex.

Suppose a restaurant's kitchen equipment gets damaged in a flood. The replacement cost in this case
would be the total expense required to buy new kitchen equipment of the same type and quality, along
with installation costs. This helps the restaurant owner decide whether it's financially sensible to replace
the damaged equipment or repair it.

AVOIDABLE COST AND UNAVOIDABLE COST

Avoidable Cost: Avoidable costs are expenses that can be trimmed or removed by making different
choices. Businesses can lower or eliminate these costs by changing their actions or strategies, allowing
for greater cost control.

Ex.

An example of an avoidable cost could be a company's subscription to a software service that is no

longer being utilized effectively. If the company decides to cancel the subscription, the cost of the
unused software becomes avoidable and the company saves money by not renewing it.

Unavoidable Cost: Unavoidable costs are essential expenses that stay consistent, regardless of decisions
made. These costs remain fixed and must be incurred, representing necessary expenditures for
operations or activities.

Ex.

Rent for a retail store is an example of an unavoidable cost. Regardless of how well the store is
performing, the rent payment must be made consistently to maintain the space for business operations.
This cost remains constant and essential, regardless of the store's performance.

RELEVANT COST AND IRRELEVANT COST

Relevant Cost: Relevant costs are expenses that sway decisions because they shift with different choices.
They offer crucial insights into making well-informed decisions by directly affecting the outcomes. For
instance, when deciding between suppliers, relevant costs would include factors like raw material costs
and shipping fees.

Ex. When a company chooses between making or buying a component, the direct material cost for
production and the purchase price from an external supplier are relevant costs. These costs directly
influence the decision.

Irrelevant Cost: Irrelevant costs are expenses that remain unchanged despite various choices. These
costs don't play a role in decision-making as they don't shift with alternatives. An example could be past
advertising expenses when considering a new product launch; those costs wouldn't influence the
decision as they're fixed and unchangeable.

An example of an irrelevant cost is the historical advertising expenses when deciding whether to launch
a new product. These past costs don't affect the decision, as they are fixed and unchangeable regardless
of the choice made.