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Irrelevant Cost Definition
An irrelevant cost is a category of cost that is not affected by managerial decisions. This means this cost does not change regardless of changes in decisions made by the management. Irrelevant costs are used in managerial accounting to describe costs that are relevant to managerial decisions but do not change as a result of the decision made. Fixed overhead cost is an example of irrelevant cost. Irrelevant costs can be positive or negative.
A Little More on What is an Irrelevant Cost
Costs are categorized as either relevant or irrelevant for the purpose of managerial decisions. While relevant costs can change as a result of the decision reached by managers, irrelevant costs remain unchanged regardless of the decision that is reached. Fixed overhead and sunk costs are examples of irrelevant costs. For instance, the book value of a company’s equipment and machinery cannot change regardless of the managerial decision that is reached.
Formal documentation of irrelevant costs is important, these costs are likely to be ignored when reaching decisions but they must be accurately documented. Also, it is important to note that it is possible for an irrelevant cost in a managerial decision to be a relevant cost in another managerial decision.