What are relevant costs?

Relevant costs are defined as costs or revenues that change as a direct result of a specific decision. This characteristic is essential in managerial decision-making because it allows managers to focus only on those costs that will be affected by their choices. When evaluating different options or courses of action, understanding which costs will vary based on the decision at hand helps in making informed financial assessments.

For instance, if a company is deciding whether to accept a special order at a discounted price, it should consider the variable costs associated with producing that order. These costs will directly impact the profitability of accepting the order, making them relevant to the decision at hand.

The other options do not represent relevant costs accurately. Costs that are unaffected by any decision or that remain constant regardless of what decision is made are typically classified as sunk costs or fixed costs, which are not relevant in the decision-making process. Similarly, historical costs that need to be reported do not influence current or future decisions, as they have already been incurred and cannot be changed. Understanding these distinctions is important for effective management accounting and making strategic decisions.