What is a 'relevant cost' in the context of short-term decision making?

What is a 'relevant cost' in the context of short-term decision making?

• A. A cost that will be unaffected by the decision and will not change as a result.
• B. A cost that will be affected by the decision and will change as a result.
• C. A sunk cost that has already been incurred.
• D. A fixed cost that will remain the same regardless of the decision.

Answer: (B)

Relevant costs are the costs that will be affected by the decision and will differ between alternatives, i.e., future incremental costs (and revenues) that arise because of choosing one option over another. These are the only costs that should influence the decision because they reflect the actual financial impact of the choice. Sunk costs, already incurred, are not considered since they cannot be changed. Likewise, costs that won’t change with the decision aren’t relevant, unless they are avoidable by selecting a different option. So the best choice is the one describing a cost that will be affected and will change as a result.

Relevant costs are the costs that will be affected by the decision and will differ between alternatives, i.e., future incremental costs (and revenues) that arise because of choosing one option over another. These are the only costs that should influence the decision because they reflect the actual financial impact of the choice. Sunk costs, already incurred, are not considered since they cannot be changed. Likewise, costs that won’t change with the decision aren’t relevant, unless they are avoidable by selecting a different option. So the best choice is the one describing a cost that will be affected and will change as a result.