11.14: Introduction to Relevant Costs
What you’ll learn to do: Recognize relevant costs for common business decisions
Knowing if a cost is relevant to the decision at hand is an important part of making good financial decisions. Taking time to leave costs in the mix that will not affect the outcome of the decision will waste valuable time. We have looked at some examples of relevant costs in some decision making situations, but let’s take a look at a few more:
In this section, we will talk about how to decide whether to add or drop a product or service. We will also discuss a “make it” or “buy it” decision. There may also be a sell it, or process it further decision to make, ending with special order decisions. All of these situations are real, and happen everyday in businesses. Having the ability to identify relevant costs and discard the ones that won’t change the outcome of a decision is crucial to success!
Remember, different costs are relevant for different decisions. So even if depreciation didn’t matter in one decision, it may weigh heavily in another! Let’s take a look at some decisions you may have to make!