Question

'All future costs are relevant.' Do you agree? Why?

   'All future costs are relevant.' Do you agree? Why?

Management and cost accounting

Management and cost accounting

Bhimani,… 6th Edition

Chapter 10, Problem 3

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Solved by Expert Ameer Said

10/29/2021

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They are future costs that differ between alternatives. In decision-making, only relevant costs should be considered because they can influence the outcome of the decision. Show more…

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'All future costs are relevant.' Do you agree? Why?

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Key Concepts

Relevant Costs

Relevant costs are future costs that differ among decision alternatives and have the potential to change based on the choice made. They are essential in the decision-making process because they help focus on the costs that will actually impact the outcome, ensuring that decisions are based on incremental differences rather than on costs that remain constant regardless of the option selected.

Sunk Costs

Sunk costs are expenditures that have already been incurred and cannot be recovered. Since they cannot be influenced by any future decisions, they are not considered relevant for decision-making. Recognizing sunk costs is important to avoid the sunk cost fallacy, where past expenses unduly influence current or future decisions.

Incremental Costs

Incremental costs represent the additional costs incurred if one option is chosen over another. They are critical in comparing alternatives because only the expenses that change between choices should be considered. Not all future costs are incremental or relevant, as some may remain unaffected regardless of the course of action chosen, thereby not influencing the decision process.

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