Irrelevant cost
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An irrelevant cost is a cost that will not change as the result of a management decision. However, the same cost may be relevant to a different management decision. Consequently, it is important to formally define and document those costs that should be excluded from consideration when reaching a decision. For example, the salary of an investor relations officer may be an irrelevant cost if a management decision relates to issuing a new product, since dealing with investors has nothing to do with that particular decision. However, if the board of directors is considering taking the company private, then it may no longer need an investor relations officer; in the latter case, the salary of the investor relations officer is highly relevant to the decision. As another example, the rent for a production building is irrelevant to the decision to automate a production line, as long as the automated equipment is still housed within the same facility.
Irrelevant costs are costs which are nonpartisan of the divers alternatives or decision. They are not included in taking a decision. Irrelevant costs can be ranked into two rubrics: sunk costs and costs which are same sort of for various options. Sunk cost is cost incurred. It can not be altered by any present or coming act. For instance if a new engine is bought to change an former one; the cost of former engine would be sunk cost. The example of irrelevant cost is fixed costs, sunk costs or book values. Irrelevant and sunk costs are to be left out when determining on a coming process of act. On the contrary, these costs can direct to an erroneous decision. For instance, at the time of decision to exchange typewriters by computers, all company passed over the cost of typewriters, although more or less of them were purchased a little time earlier before the decision. A couple of company could have been wrong and retarded the computerization decision, if the cost of typewritters had been kept in mind. Sunk costs contain costs like insurance that has already been settled up by the coropration, therefore it must not be impacted by any coming decision. Unavoidable costs are those that the corporation will endure without regard for the decision it takes.
Kinds of Irrelevant Costs
Here are the exampeles of the irrelevant cost:
- Sunk Cost
- Committed costs
- Non-cash expenses
- Overheads
Sunk Cost
Sunk costs pass to the expenses which have been endured in a prior period . Sunk costs are irrelevant, as they do not impact the coming cash flows.The should have no impact on decisions about the future. (Garrison R. and other 1994, no.6)
Committed costs
Coming costs, which must not be changed, are not relevant as they will have to be endured regardless of the decision took.
Non-cash expenses
Non-cash expenses same as depreciation and amortization are not categorized as relevant as they do not impact the cash flows of a company.
Overheads
General and administrative overheads, that are not impacted by the replacement decisions, are not relevant. (S. Bragg, 2018)
References
- Bragg S., (2018). Irrelevant costs
- Coast, J. (2004). Is economic evaluation in touch with society's health values?. BMJ: British medical journal, 329(7476), 1233.
- Garrison R., Noreen E., Chesley D., Carroll R. F., Managerial accounting: Concepts for planning, control, decision making, (5-11)
- Singh S., 2018 [http://www.differencebetween.net/business/difference-between-relevant-cost-and-irrelevant-cost/ Difference Between Relevant Cost and Irrelevant Cost)
Author: Natalia Bielak
