Definitions
This is the process of selecting the best alternative from available options in business.
What is decision-making?
These costs will occur in the future and differ between alternatives.
What are relevant costs?
These costs do not change between options and should not affect decisions.
What are irrelevant costs?
These are costs that will occur in the future and differ between alternatives.
What are relevant costs?
Name one example of a relevant cost from the presentation.
Direct materials / extra labor / opportunity cost
Name an irrelevant cost given in the presentation.
Depreciation / fixed rent / sunk costs
These are costs that have already been incurred or do not change between options.
What are irrelevant costs?
Relevant costs are ___, meaning they can be avoided if an alternative is chosen.
What are avoidable costs?
Sunk costs are a type of ___ cost.
What is irrelevant cost?
This type of cost represents benefits lost when choosing one option over another.
What is opportunity cost?
Do fixed overhead costs usually count as relevant in decision-making?
No
True or False: Depreciation on existing machines is usually a relevant cost.
False
This cost cannot be recovered and should not affect future decisions.
What is a sunk cost?
What two features make a cost relevant?
Must be future and differ between alternatives
Why are irrelevant costs ignored in decision-making?
They do not affect the outcome / they remain the same