Relevant Cost Principles

Relevant Cost Principles

1. Future

   • A decision made today cannot change the past and so only future costs are considered for the decison making .Past costs are treated as sunk cost and cost resulting from contractual obligation are considered as committed costs which is also not accounted

2. Incremental

   • Only those costs effected by the decisions are only considered .Committed costs are ignored

3. Cash flow

   • To evaluate a decision actual cash flows are considered .The cost forming as a part of accounting conventions such as depreciation and amortization are not relevant.Accounting adjustments such as interdepartmental charges are also not considered

4. Oppurtunity costs

   • The value of benefit sacrificed when one course of action is chosen, in preference to an alternative. The opportunity cost is represented by the foregone potential benefit from the best rejected course of action.

5. In simple terms, a relevant cost is a future cash flow arising as a direct consequence of a decision. In order for a cost to be relevant to a decision, it must therefore meet all four of these criteria:

6. Remmember that sum of relevant cost is not the price to be caculated for the decison , a mark-up needs to be put inorder for the decision to be successful

7. It does not always take the current business overheads into the scenario of decison making