How is the convention for using relevant costs in decision-making defined?

How is the convention for using relevant costs in decision-making defined?

• A. All costs that will be incurred in the future are relevant.
• B. Only incremental costs and revenues that will change as a result of the decision are considered.
• C. Sunk costs should be included in decision making.
• D. Opportunity costs are ignored in decision making.

Answer: (B)

In decision-making, focus on costs and revenues that will change as a result of the choice. These are the incremental (or differential) amounts that actually move when you pick one option over another. That’s why the relevant costs approach emphasizes what will change, not every future cost. Why this is the best fit: by concentrating on incremental costs and revenues, you’re comparing the financial impact that would differ between options, which is what matters for a rational decision. Why the other ideas don’t fit: not all future costs are relevant—only those that would change with the decision. Past costs are sunk and cannot be influenced by current choices, so they should be ignored. And opportunity costs matter here because choosing one option excludes the next best alternative, representing a real opportunity foregone that should be considered in the decision.

In decision-making, focus on costs and revenues that will change as a result of the choice. These are the incremental (or differential) amounts that actually move when you pick one option over another. That’s why the relevant costs approach emphasizes what will change, not every future cost.

Why this is the best fit: by concentrating on incremental costs and revenues, you’re comparing the financial impact that would differ between options, which is what matters for a rational decision.

Why the other ideas don’t fit: not all future costs are relevant—only those that would change with the decision. Past costs are sunk and cannot be influenced by current choices, so they should be ignored. And opportunity costs matter here because choosing one option excludes the next best alternative, representing a real opportunity foregone that should be considered in the decision.