What are relevant costs?

Relevant costs are specifically those costs that are incurred in the future and vary between different alternatives. These costs play a crucial role in decision-making processes, especially when evaluating different options or courses of action. For example, when considering whether to accept a special order or make any changes to operations, only the costs that will be affected by that decision are relevant. This means that the costs must not only be future-oriented, but they must also differ according to the choices being assessed.

On the other hand, fixed costs that remain unchanged regardless of the decision made do not qualify as relevant costs. Historical costs are also not considered relevant because they do not affect current or future decisions; they are already incurred and cannot be altered. Predetermined costs may be useful for budgeting but do not serve as relevant costs if they are fixed and do not vary with the alternative actions being considered. Thus, the focus on future expenses that vary is what fundamentally defines relevant costs.