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Relevant costing

Future

 Only future cash flows that occur as a result of the decision should be
considered, e.g. any future costs or revenue.

 Sunk costs (i.e. costs that have already been incurred in the past) are not
relevant to the decision and should therefore be ignored – we cannot change
the past.

Incremental

r Only extra cash flows that occur as a result of the decision should be
considered, e.g. extra costs or revenues.

 Fixed costs should be ignored unless there is an incremental fixed cost as a
result of the decision.

 Committed costs (i.e. costs that are unavoidable in the future) are not
affected by the decision and should therefore be ignored.

 Opportunity costs should be included – look at the next best alternative use
of a resource.

Cash

 Only cash items are relevant to the decision. For example, depreciation is not
relevant since it is not a cash flow.

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