What are relevant costs in decision-making?

Relevant costs in decision-making refer specifically to the costs that will be directly affected by the decision being considered. These costs are crucial for future actions because they represent the financial implications of choosing one alternative over another. In this context, relevant costs include future costs and potential benefits that will differ depending on the decision made, thus directly influencing the outcome.

By focusing on future costs that will change as a result of the decision—such as variable costs directly tied to production levels or specific project costs—decision-makers can assess the potential impact and align their strategies accordingly. This aspect is fundamental in evaluating options effectively, allowing for informed decision-making based on cost-benefit analyses.

Other options, while mentioning various types of costs, do not align with the definition of relevant costs. Past costs are considered sunk costs and should not influence current decisions, while costs that do not change regardless of the decision are irrelevant for decision-making purposes. Similarly, fixed costs associated with long-term investments are generally considered committed costs and are not pertinent to short-term decision-making analyses where only future costs that differ should be evaluated.