Relevant cost for decision making is one of the wonderful tool of cost accounting in which we give the first preference to pay the cost which will be relevant. It means, we pay only minimum cost for achieving highest return. It means also, we leave all the irrelevant or non-relevant cost.

For example, you are buying the blank register of RS. 20 per sale from Mr. A whole-seller at the cost of Rs. 14 per register. But, after 2 months, you come to know that MR. C whole-seller sells same quality register of Rs. 12. OMG! you were losing Rs. 2 per register. You just leave MR. A and follow Mr. C because your cost is reducing with RS. 2. If every month for your retail shop, you are buying 10000 register, you are getting big saving of Rs. 20,000. So, Rs. 12 is the current time relevant cost for buying register.

Relevant Vs Non-Relevant Cost

Meaning

All cost will be relevant if we can not leave all such cost if we have to take big business decision.

All cost will be non-relevant if we can take big business decisions without such costs.

Clearing With Simple Example

When resources are Constrained

You have no money in pocket and you are doing business. At that time, you take big business decision by watching relevant cost only.

For example, you are selling A, B and C products. If you are limited money and time. So, you have to choose best one product out of three products. For this, first you identify its main constrains. One is cost of producing and time of production. In this case , you will produce only those product which will give highest profit per hour.

You can calculate gross profit or contribution margin = selling value - variable cost

Second gross profit or contribution margin per hour = Total contribution margin per product / total hours of production.

You will choose one product out of A, B and C which will give highest contribution margin per hour.

Learn same with following Video Tutorial

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