Relevant cost - Revision history

Designing Buildings at 09:14, 28 January 2021

2021-01-28T09:14:45Z

← Older revision		Revision as of 09:14, 28 January 2021
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	* Opportunity cost: The amount that will be lost in terms of missed opportunities as a result of the decision.		* Opportunity cost: The amount that will be lost in terms of missed opportunities as a result of the decision.

−	~~= Find out more =~~	+	= Related articles on Designing Buildings Wiki =
−		+
−	=== Related articles on Designing Buildings Wiki ===	+

	* Accounting.		* Accounting.
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	* Yield.		* Yield.

−	[[Category:Cost_/_business_planning]] [[Category:Procurement]]	+	[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Definitions]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Designing Buildings at 07:08, 7 August 2018

2018-08-07T07:08:17Z

← Older revision		Revision as of 07:08, 7 August 2018
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−	Relevant cost, also known as differential cost, is an accounting term that is used to refer to costs that pertain to a particular decision. This means that those costs could be avoided depending on the decision ~~that~~ is taken~~, and therefore relevant~~ costs will differ between the alternative ~~decisions~~ being considered.	+	Relevant cost, also known as differential cost, is an accounting term that is used to refer to costs that pertain to a particular decision. This means that those costs could be avoided depending on whether the decision is taken. Relevant costs will differ between the alternative options being considered.

−	By identifying the relevant costs that relate to a particular ~~business~~ decision, ~~any unnecessary~~ cost information can be removed; these are referred to as irrelevant costs. Time and effort can be saved by distinguishing between relevant and irrelevant costs when analysing ~~decision~~ options.	+	By identifying the relevant costs that relate to a particular decision, cost information that is common to all options, and so not relevant to the decision can be removed; these are referred to as irrelevant costs. Time and effort can be saved by distinguishing between relevant and irrelevant costs when analysing options.

−	~~Typically, relevant~~ costs are considered as two ~~different~~ categories:	+	Relevant costs are typically considered in two categories:

−	* Future cost: The cost will be incurred in the future as a result of the decision ~~being made.~~ (If this future cost does not change based on the decision then it is an irrelevant cost).	+	* Future cost: The cost that will be incurred in the future as a result of the decision (If this future cost does not change based on the decision then it is an irrelevant cost).
−	* Opportunity cost: The amount that will ~~potentially~~ be lost in terms of ~~the opportunity~~ as a result of the decision ~~being made.~~	+	* Opportunity cost: The amount that will be lost in terms of missed opportunities as a result of the decision.
−		+
−	For example, consider a construction company that is in the process of completing a residential building, has already spent £500,000 and needs to spend an additional £250,000 for completion. Due to a change in market conditions (i.e. an economic downturn) the completed building is unlikely to be sold for the price it was originally expected to, say £900,000. When analysing the different options available to the company, the already-spent £500,000 should be regarded as an irrelevant cost, since they might conclude that the project should be completed quickly or to a lower standard of quality rather than spend £750,000 to return a lower profit of £150,000. Whereas, by focusing on the relevant (future) costs the decision to continue the project as planned can be based on spending £250,000 to return £900,000.	+

	= Find out more =		= Find out more =

Editor at 16:19, 6 August 2018

2018-08-06T16:19:31Z

← Older revision		Revision as of 16:19, 6 August 2018
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	* Hard costs v soft costs.		* Hard costs v soft costs.
	* Initial cost appraisal.		* Initial cost appraisal.
		+	* Irrelevant cost.
	* Margin.		* Margin.
	* Turnover.		* Turnover.

Editor at 16:02, 6 August 2018

2018-08-06T16:02:53Z

← Older revision		Revision as of 16:02, 6 August 2018
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	* Business plan.		* Business plan.
	* Cash flow.		* Cash flow.
		+	* Cost.
	* Cost control.		* Cost control.
	* Cost engineering.		* Cost engineering.

Editor: Created page with "Relevant cost, also known as differential cost, is an accounting term that is used to refer to costs that pertain to a particular decision. This means that those costs could be a..."

2018-08-06T16:02:30Z

Created page with "Relevant cost, also known as differential cost, is an accounting term that is used to refer to costs that pertain to a particular decision. This means that those costs could be a..."

New page

Relevant cost, also known as differential cost, is an accounting term that is used to refer to costs that pertain to a particular decision. This means that those costs could be avoided depending on the decision that is taken, and therefore relevant costs will differ between the alternative decisions being considered.

By identifying the relevant costs that relate to a particular business decision, any unnecessary cost information can be removed; these are referred to as irrelevant costs. Time and effort can be saved by distinguishing between relevant and irrelevant costs when analysing decision options.

Typically, relevant costs are considered as two different categories:

* Future cost: The cost will be incurred in the future as a result of the decision being made. (If this future cost does not change based on the decision then it is an irrelevant cost).
* Opportunity cost: The amount that will potentially be lost in terms of the opportunity as a result of the decision being made.

For example, consider a construction company that is in the process of completing a residential building, has already spent £500,000 and needs to spend an additional £250,000 for completion. Due to a change in market conditions (i.e. an economic downturn) the completed building is unlikely to be sold for the price it was originally expected to, say £900,000. When analysing the different options available to the company, the already-spent £500,000 should be regarded as an irrelevant cost, since they might conclude that the project should be completed quickly or to a lower standard of quality rather than spend £750,000 to return a lower profit of £150,000. Whereas, by focusing on the relevant (future) costs the decision to continue the project as planned can be based on spending £250,000 to return £900,000.

= Find out more =

=== Related articles on Designing Buildings Wiki ===

* Accounting.
* Business plan.
* Cash flow.
* Cost control.
* Cost engineering.
* Cost plans.
* Elemental cost plan.
* Estimate.
* Front-loaded costs.
* Hard costs v soft costs.
* Initial cost appraisal.
* Margin.
* Turnover.
* Yield.

[[Category:Cost_/_business_planning]] [[Category:Procurement]]