Relevant Costing is an approach that focuses managerial attention on a

decision’s relevant information1. It refers to the incremental and avoidable

cost of implementing a business decision2. Relevant costing attempts to
determine the objective cost of a business decision, which is the extent of
cash outflows that shall result from its implementation2.

Here are some key points about relevant costing:

Relevance of Information: Relevant information is logically related and

pertinent to a given decision. It may be both quantitative and qualitative1.
For information to be relevant, it must possess three characteristics1:
Be associated with the decision under consideration.
Be important to the decision maker.
Have a connection to, or bearing on some future endeavor.
Incremental Costs: Incremental cost (or differential cost) is the amount of
cost that varies across decision choices1. Relevant costing compares the
incremental revenues and/or costs associated with alternative decisions1.
Avoidable and Sunk Costs: Only those costs are relevant to a decision that
can be avoided if the decision is not implemented2. A sunk cost is a cost
incurred in the past to acquire an asset or resource that is not relevant to
any future courses of action1.
Opportunity Costs: Opportunity cost represents the potential benefit
foregone because one course of action is chosen over another1.
Application: Relevant costing techniques are commonly applied in
situations such as replacing an asset, outsourcing a product or component,
allocating scarce resources, manipulating sales mix, and evaluating special
orders1.
Remember, the key to relevant costing is the ability to filter what is and isn’t
relevant to a business decision2.