Relevant Costs and Revenues

Relevant Costing is the term used to describe the approach used by management accountants to assemble the financial information needed to evaluate economic decisions. The principles of relevant costing apply equally well to short-term or long-term decisions and have a significant influence on the way cost information is classified and economic decisions models are constructed by management accountants. We have already seen a simple application of the relevant costing approach to structuring economic decision information in cost-volume-profit analysis. Before looking at more complex decision contexts relying on relevant costing principles, we shall examine the important aspects of the approach.

Relevant Costing

The idea of relevant costing recognises that for economic decision-making purposes a single universally applicable cost value cannot be assigned to a cost objective (e.g. a product), but instead the costs applicable to a cost objective will depend on the decision-context. Products and other cost objectives will therefore have different economic values in different decision contexts. The accounting literature often refers to this as 'different costs for different purposes'. The relevant costing approach specifies the following criteria for deciding which costs and revenues are relevant to a particular decision:

Relevant Costs (and revenues) are FUTURE CASH FLOWS THAT DIFFER BETWEEN THE ALTERNATIVES CONSIDERED