When it comes to running a business a person has to make up many costs. There are many types of costs that are made such as fixed cost, variable cost, operating costs, sinking cost, etc. Two main costs are the relevant costs and the irrelevant costs. Both these costs have a vast difference between them.
Relevant Cost vs Irrelevant Cost
The main difference between relevant cost and the irrelevant cost is that when a person pays a relevant cost in a company or business it is termed into a type of a variable that can be avoided, and on the other hand, the irrelevant cost is when a person paying that cost in a business is a fixed cost and cannot be avoided.
A relevant cost is a cost that is said to differ at different places. The decisions are taken according to the future costs and not the historical cost when it comes to deciding the relevant cost. Relevant costs are those which are stated to be avoidable while a decision is implemented.
An irrelevant cost is a cost that is always the same regardless of any decisions taken while they are implemented by someone. In short, they are never considered when a decision is taken regarding a cost. There are two main categories of irrelevant costs based on their characteristics, one which is sunk cost and the other which is constant regardless of any alternative.
Comparison Table Between Relevant Cost and Irrelevant Cost
| Parameters of Comparison | Relevant Cost | Irrelevant Cost |
| Type of cost | This is a kind of variable cost. | This is a kind of fixed cost. |
| Function | This type of cost helps to cover expenses related to Operational and recurring expenditure. | This type of cost helps to cover expenses related to capital. |
| Term of cost | This type of cost is usually on a short-term basis. | This type of cost is usually on a long-term basis. |
| Management Type | This type of cost in a company is always incurred by the lower management. | This type of cost is incurred by the higher management in a company. |
| Consideration | This cost can be avoided. | This cot cannot be avoided. |
What is Relevant Cost?
A relevant cost is a cost that is said to differ at different places. The decisions are taken according to the future costs and not the historical cost when it comes to deciding the relevant cost. Relevant costs are those which are stated to be avoidable while a decision is implemented.
The relevant cost is the addition of the loading and unloading charge of goods when it’s consigned or sold to the opposite party in a business. This, in actuality, is not the cost of charges of fuel and transport in business. A relevant cost is also known to be told as differential costs.
There is a difference observed in the relevant cost as per each alternative decision. There are four types of relevant cost, and they are the future cash flows that are costs which are incurred as per future decision, available costs that are costs that are available in case of any decision is not implemented, the opportunity cost which is sacrificed when a decision is taken and the incremental cost.
What is Irrelevant Cost?
An irrelevant cost is a cost that is always the same regardless of any decisions taken while they are implemented by someone. In short, they are never considered when a decision is taken regarding a cost. There are two main categories of irrelevant costs based on their characteristics. One is sunk cost, and the other is constant regardless of any alternative.
A sunk cost is a cost that has already been incurred. This kind of cost cannot be changed any decision taken in the present or future. An example of this can be when a new piece of furniture is purchased and replaced with an item of old furniture, then the cost of that old furniture is said to be the sunk cost. An irrelevant cost is always fixed.
There are four types of irrelevant costs are the sunk cost which is the cost of the old furniture in the example, the committed cost which cannot be altered as it’s a future cost. Non-cash expenses include the depreciation of an asset and the overheads during the administration work. These costs are never being taken into consideration while making a decision.
Main Differences Between Relevant cost and Irrelevant Cost
- A relevant cost is always said to be a variable cost, and an irrelevant cost is always said to be a fixed cost.
- A relevant cost covers expenses related to Operational and recurring expenditure, and on the other hand, an irrelevant cost covers expenses related to capital expenditure.
- A relevant cost is usually for a short-term basis, and on the other hand, an irrelevant cost is usually for a long-term basis.
- A relevant cost in a company is always incurred by the lower management, and on the other hand, is a company, the irrelevant cost is incurred by the higher management.
- In a business, often, a relevant cost can be avoided, and on the other hand, in a business, often, an irrelevant cost cannot be avoided.
Conclusion
There are many types of costs that are incurred today, and among them are a relevant cost and an irrelevant cost that occurs in a business. Even though both these costs are for business, they have their differences based on time zones, their cash flows, their coverage, their scope, their level, etc.
One cost is taken only for a short period, and on the other hand, the other is taken for long periods. One is fixed while the other keeps changing according to the decisions implemented in a relevant business. One should know the difference between these two costs, that is, the relevant cost and irrelevant cost for conducting a smooth Functioning of their business.
References
- https://books.google.com/books?hl=en&lr=&id=HhQcEAAAQBAJ&oi=fnd&pg=PP1&dq=Relevant+cost+vs+irrelevant+cost&ots=CDf4RKp-2E&sig=6mcyLLbBCv6jEQow14y1N8xMmoY
- https://www.sciencedirect.com/science/article/pii/S0890838914000699