Question

Should depreciation expense related to equipment already purchased be considered a relevant cost

Answer 1

No, the depreciation expenses related to equipment already purchased should NOT be considered a relevant cost.

Relevant cost is 'relevant' to decision making process. The decision pertains to some future events or tasks that are to be decided to be be taken up or not.

Depreciation expenses is not considered 'relevant' because:

>The equipment has already been purchased and hence the cost became SUNK cost.

>No cash is actually paid as 'depreciation expenses'

>Depreciation expenses is after all part of the 'purchase cost' been allocated systematically over the life of asset. Such cos has already been incurred when asset was acquired.

Hence, Depreciation expenses should not be considered relevant cost.