April 19, 2021

SB-Accounting

Accounting + Finance Blog

Irrelevant cost: Definition and Key Explanations

Irrelevant cost: Definition and Key Explanations
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In making decisions only costs that are relevant to it are considered. However, this does not mean that the costs that are not relevant to the decision are not important. Classifying costs as relevant and non-relevant is necessary so that management can easily filter the bad eggs.

Meaning of irrelevant cost

These are costs that are not important to a particular decision to be taken by management and therefore will not affect the entity’s future cash flow.

Key Explanations

Irrelevant cost and revenue are the opposite of its counterpart. So, an understanding of relevant cost is enough to explain the other.

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It’s not required by management. Management does not need this type of cost to make a future decision. This doesn’t mean that they are not important to management. As this kind of costs and revenue can be used to forecast future events.

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For example, a sales figure may increase close to the end of every month. The knowledge of this will help the inventory manager to know when to order more stock into the firm’s warehouse.

May not change future cash flow. These costs and revenues do not decrease or increase the firm’s future cash flow. Although, it will affect the firm’s current cash flow. This is because the cost or revenue is the latest event in the entity.

Examples are committed costs and revenue, past and sunk costs and revenue, notional cost like depreciation and charging of rent of the company’s building.

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Conclusion

Non-relevant cost or revenue is not relevant to a firm’s management because it is not important in making a future decision, therefore will not impact the company’s cash flow. However, once the decision has been made, the cost and revenue involved become irrelevant

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