Question

Explain a situation you have observed (or read about) in which a firm made a decision considering irrelevant costs or did not consider relevant costs. What was the outcome of the decision, and what could have been done differently?

Answer 1

Irrelevant costs are costs that do not change in the future as a result of management decision .The irrelevant costs are fixed costs , sunk cost ,overhead cost etc. Relevant costs are costs that may be different between alternatives . Costs that are affected by decisions are relevant costs and those that are not affected by decisions are irrelevant costs.Irrelevant costs cannot be recovered and it cannot be changed . Irrelevant costs are not included in the future cost of business. Thus irrelevant cost should not be taken in decision making as such cost do not affect future course of action.If a firm considers only irrelevant cost which cannot be recovered , the firm will incur loss.Alternatively ,the firm should have considered relevant costs which are important to take the business forward.Relevant costs describes the costs which can be avoided while making business decisions and thus preventing the business from incurring loss.