Question

In 150 words or fewer, explain the difference between relevant costs, irrelevant costs, and sunk costs.

Answer 1

Relevant Costs

Relevant costs are those costs that are pertinent to the decision on hand.They are used in decision making by the management.They are used to eliminate unnecessary data and aid in decision making. Examples of situation where relevant cost is used

Determining to continue or eliminate a product

Make vs Buy decisions

Accepting a special order

Irrrelevant Costs

They are the costs that will not change as a result of management decision. example Depreciation, Rent, Salary

Sunk Costs

These are costs which are incurred in past and cannot be recovered.They are considered as irrelevant in decision making. Example purchase price of materials or equipment bought.