Relevant costs are costs that will be different when two or more alternatives are involved. Relevant cost or expenses are attributable or chargeable to one or more activities on the basis of benefits received or some other logical relationship. These costs are also known as differential costs. Relevant costs are also differential or quantifiable future cost that must be considered in making a particular decision.
Relevant costs are subject to change depending upon the decisions that are made. It is a managerial accounting term that describes costs that are specific to management's decisions. The relevant costs eliminate unnecessary data that could complicate the decision-making process. A relevant cost may be important in one situation and irrelevant in another. For example when management uses relevant costs can be seen when it is determining whether to sell or keep a business unit, make or buy an item, or accept a special order.
Relevant costs will make a difference in a decision. Relevant costs are future costs that differ among alternatives. For example if a company decides whether to eliminate a product line or not. The product line accounts for 5% of the company’s activities. In case the product line eliminated, the other employees of the company will receive the same salaries. However the product line managers and other employees who were working directly for the product line will be terminated. Hence the salaries will be eliminated.
Under relevant costs the sunk costs are relevant. The future costs may or may not be relevant. In case the future costs are to be incurred regardless of the decisions made, the costs are not relevant. The only costs that are relevant are those that differ between the alternatives being considered.