11.7: Why It Matters- Relevant Revenues and Costs
Why learn to determine relevant revenues and costs?
Knowing which costs are important and which we can ignore when making decisions will save time in the decision making process and also make it more effective. Some costs don’t make a difference, but unfortunately, there is no clear guide for which ones matter and which ones don’t.
Only with experience and practice, can a manager learn which costs are relevant to a decision. Learning the process is important for the profitability of your company and to make the best use of resources.
Sunk costs, opportunity costs and avoidable and unavoidable costs all need to be understood to determine what the differential costs are when you make decisions about adding or dropping a product line, making or buying a component part or figuring out how to best use a constrained resource.