Relevant and Irrelevant Costs

Relevant costs are expected future costs that differ among alternative courses of action and may be eliminated if some economic activity is changed or deleted.

Irrelevant costs are unaffected by management’s actions. Sunk costs are an example of irrelevant costs. Sunk costs are past costs that are now irrevocable, such as depreciation on machinery. When confronted with a choice, they are not relevant and should not be considered in a decision-making analysis, except for possible tax effects upon their disposition and “painful” lessons to be learned from past mistakes.