0The purpose of classifying cost into relevant and irrelevant is to eliminate unnecessary information that complicates the process of decision making.
Relevant Cost: Cost which will be affected by the decision being taken. It is relevant for decision making. They affect the future cash flow of the enterprise.
Conditions to be satisfied for relevant cost:
- It should occur in future
- It should differ among the alternative course of action
Example of Relevant cost: Avoidable Cost, Opportunity cost, Future Cash flows etc.
Irrelevant Cost: Cost which remain unaltered regardless of decision being taken. It is irrelevant for decision making. They don’t affect the future cash flow of the enterprise.
Example of Irrelevant cost: Sunk Cost, non cash expenses, general overheads etc.
