Plain definition
A relevant cost is a future cost that differs between the options being considered. The comparison also includes benefits given up, such as the proceeds from selling a resource that would instead be used. A past payment is not relevant merely because it appears in the accounts, and a future cost is not relevant if it is identical under every option.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose an unused batch of material cost . It can now be sold for , or used in a special order paying . The order needs of additional labour and delivery. There is spare capacity, no other use for the material, and no need to replace it.
Accepting the order produces after the additional costs. Selling the material produces . The order is therefore better by on these assumptions. Charging its historical purchase cost to the decision would obscure the choice still available.
| Order receipts | |
|---|---|
| Additional labour and delivery | |
| Sale proceeds given up | |
| Benefit over selling the material |
Why it matters
Decision costs and reporting costs answer different questions. The accounting loss on old material may need recognition, but it does not determine whether an available order improves the company’s future cash position.
Practical consequence
Write down the alternatives and their future receipts and payments. Remove amounts that remain the same in both, and add the value of opportunities displaced. Check capacity and replacement needs: regularly used material may require replacement, making its current replacement cost relevant rather than its resale value.