Concept of Relevant Cost and Irrelevant Cost

1. Relevant costs are given utmost importance in managerial decision-making. Their magnitude will affect a decision being made. The main managerial decision-making involves the planning for the future of the business in terms of new products, entry in new markets etc., and other decisions like alternative course of action. During the course of such decision-making, the management has to consider various cost aspects involved. These costs are also called relevant costs as they are relevant for the future decision-making. So a cost can be considered as relevant cost if it helps the management to take a right decision to achieve the objectives of the company.

For example, a company now has two types of products and the direct material cost per unit is Rs.25 and direct labor per unit is Rs.20.  It wants to make some changes in its product line. The new product line requires direct material at Rs.25 per unit and labor cost of Rs.22 per unit. In this case, the cost of material is constant and it is not relevant for decision-making. Hence, the labor cost is changing from the present level in case of the proposal. Hence, the labor cost is relevant.

       ii. Irrelevant costs are those costs, which will not be affected by any decision made by the management. 

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