Define relevant costs.

Relevant costs are those costs that will be directly affected by a specific decision. They are future costs that will change as a result of the decision being made, meaning they are relevant to the decision-making process. For example, if a company is considering whether to take on a new project, the costs directly associated with that project—such as materials, labor, and other expenses that would be incurred only if the project goes ahead—would be considered relevant costs.

This distinction is crucial in management accounting as it helps managers focus on the financial elements that will influenced by their decisions, ensuring that resources are allocated efficiently. Making decisions without consideration of relevant costs could lead to poor financial outcomes, as managers may not be seeing the full impact of their choices.

In contrast, costs that are always incurred in a business, costs that will not change regardless of the decision, or costs related to historical performance do not provide the necessary insights for decision-making. These types of costs typically do not vary with the decision at hand and hence are not considered relevant for assessing current or future opportunities.