Relevant vs. Irrelevant Costs: Key Differences Every Manager Should Know
Relevant costs change with a decision; irrelevant costs stay the same no matter what you choose.
Managers often lump all past expenses into “cost of doing business,” but yesterday’s price tag can’t guide tomorrow’s choice—only future, decision-specific dollars matter.
Key Differences
Relevant costs are incremental and avoidable; irrelevant costs are sunk or fixed. One drives strategy, the other just sits on the balance sheet.
Which One Should You Choose?
Focus on relevant costs for every new project; keep irrelevant costs visible only for compliance, never for go/no-go calls.
Examples and Daily Life
When Amazon’s logistics team debates drone delivery, fuel for trucks is irrelevant—already budgeted. The extra battery cost per drone is relevant.
Are depreciation charges relevant?
No, they’re sunk and non-cash; ignore them for new decisions.
Can fixed costs ever be relevant?
Yes, if a decision changes their total amount—like adding a new factory.
How do I spot a sunk cost fast?
Ask: “Will this number change if I pick option A over B?” If no, it’s irrelevant.