An irrelevant cost is a cost that will not be affected by any decision made now or in the future. It does not influence the outcome of a specific management decision.
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Irrelevant costs remain unchanged regardless of the decision taken.
Sunk costs are always considered irrelevant because they have already been incurred and cannot be recovered.
Fixed costs can sometimes be irrelevant if they do not change with the decision at hand.
Only relevant costs should be considered when making short-term business decisions, as they affect the outcome.
Understanding irrelevant costs helps managers avoid focusing on unnecessary information during decision-making.
Review Questions
What makes a cost irrelevant in decision-making?
Why are sunk costs considered irrelevant?
How do fixed costs sometimes become irrelevant in short-term decisions?
Related terms
Relevant Cost: Costs that directly impact a specific management decision and change depending on the chosen alternative.
Sunk Cost: Costs that have already been incurred and cannot be recovered, making them irrelevant to future decisions.
Fixed Cost: Costs that do not vary with production levels or business activity but can sometimes be deemed irrelevant for specific decisions if unaffected.