What is relevant costing?

Relevant costing refers to the concept that focuses on costs that will change as a result of specific management decisions. These costs are significant for decision-making because they directly influence the outcome of a choice, such as whether to accept a special order or discontinue a product line.

For instance, when evaluating whether to take on a new project or product, a manager will examine only those costs that will increase or decrease as a result of that decision — including variable costs associated with production, potential additional fixed costs, and any opportunity costs. Costs that remain unchanged regardless of the decision, such as sunk costs, do not factor into this analysis, making it essential for decision-makers to isolate only the relevant costs that impact their options.

In summary, relevant costing highlights how specific costs can inform strategic decisions and are indispensable in ensuring that choices align with the company's financial goals.