Understanding Relevant and Irrelevant Costs for Decision Making

Unit 3 - Discussion Board Relevant Vs. Irrelevant Information Relevant and irrelevant information are processed every day by individuals and businesses alike to make cost decisions. "Relevant costs are expected future costs that differ among alternative courses of action being considered," and an irrelevant cost refers to a cost that "does not change regardless of changes in decisions made by the management" (Datar, 2020, p. 976; Gordon, 2022). It's important for a business to understand what type of cost they're dealing with to make decisions affecting long term profitability. It can help management to make critical business decisions on investments that will directly affect their success. The two main types of irrelevant cost discussed in the textbook are sunk costs and overhead costs. A sunk cost defined by the text is a "past cost that has already been incurred regardless of whether the product is made or bought" (Datar, 2020, p. 49). Some examples of sunk cost include the rent I paid for an apartment in the year of 2022, a computer I purchased two years ago, or my undergraduate degree. Next, an overhead cost is the expense associated with running a business that's not related to producing a product or service. Some examples of this include office supplies, building rent, utilities, and insurance. Scenario I will provide an example where distinguishing between relevant and irrelevant costs can be of the upmost importance to the decision-making process. A real-world example is when my previous employer, UPS, had to replace an out dated mechanic system, and had to decide whether they wanted to develop a new robotic system in house or to purchase from an outside vendor. The relevant cost would be investing into an R&D team and experimenting, or paying for outside service and additional setup/maintenance costs. The irrelevant cost would be a sunk cost in this example because the old, out