Definition of Irrelevant cost:
A cost incurred by a company which is unaffected by managements decisions. Such costs can be either positive or negative and may even turn out to be a relevant cost in certain situations. For example, if a company bought an off-the-shelf software program but it did not work as intended and cannot be returned, the cost incurred (sunk cost) becomes irrelevant regardless of managements decision.
Classifying costs as either irrelevant or relevant is useful for managers making decisions about the profitability of different alternatives. Costs that stay the same, regardless of which alternative is chosen, are irrelevant to the decision being made.
Irrelevant costs are costs, either positive or negative, that would not be affected by a management decision. Irrelevant costs, such as fixed overhead and sunk costs, are therefore ignored when that decision is made. However, it’s critical for a manager to be able to distinguish an irrelevant cost in order to potentially save the business.
How to use Irrelevant cost in a sentence?
- Relevant costs are costs that will be affected by a managerial decision.
- There is no correct answer for each business, it will often alter per situation.
- Irrelevant costs are costs that won’t be affected by a managerial decision.
- Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.
- Irrelevant costs are those that will not change in the future when you make one decision versus another.
Meaning of Irrelevant cost & Irrelevant cost Definition