What is an Irrelevant Cost? - QS Study

An irrelevant cost is a cost that will not change as the result of a management decision. However, the same cost may be relevant to a different management decision. Consequently, it is important to formally define and document those costs that should be excluded from consideration when reaching a decision.

Irrelevant Cost is a managerial accounting term that represents a cost, either positive or negative, that does not relate to a situation requiring management’s decision.

As with relevant costs, irrelevant costs may be irrelevant for some situations but relevant for others. Examples of irrelevant costs are fixed overheads, notional costs, sunk costs and book values.

For example, the salary of an investor relations officer may be an irrelevant cost if a management decision relates to issuing a new product, since dealing with investors has nothing to do with that particular decision. However, if the board of directors is considering taking the company private, then it may no longer need an investor relations officer; in the latter case, the salary of the investor relations officer is highly relevant to the decision. As another example, the rent for a production building is irrelevant to the decision to automate a production line, as long as the automated equipment is still housed within the same facility.

Non-cash items, such as depreciation and amortization, are frequently categorized as irrelevant costs for most types of management decisions, since they do not impact cash flows.

Sunk costs, such as the purchased cost of a fixed asset that was incurred in a prior period, are also usually considered irrelevant when making decisions on a go-forward basis.