Identify the relevant costs to pricing and explain their significance.

 

Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. 

Relevant cost, also called differential cost. Relevant costs will vary based on the context of the decision, such as an omnichannel business analysis by a multi-platform retailer.

• Future Cost - Incurred in the future based on the potential decision made. This should vary from decision option to decision option. If this does not change based on the decision, then it is an irrelevant cost see below.
• Opportunity Cost The cost in lost opportunity depending on the decision made.
• Sunk Cost - Costs that have already been paid are considered irrelevant.
• Committed Cost - A future cost that is considered irrelevant. If the future cost must be paid regardless of the decision made then it is irrelevant.
• Development Time (Future cost) How much time will it take to develop each option?
• Developer Resources (Future cost) - How many people and at what wage are required to build each option
• Time to Market (Opportunity cost) How much will a difference in delivery time impact sales and what is the difference
• Perceived Performance (Opportunity cost) Is one option better performing than the other, and what is the expected abandonment rate based on that performance difference
• Omnichannel Marketing (Future & Opportunity cost) Can one option fit the overall brand experience better than the other and is there a cost associated with integrating the application into the brand
• Existing Website (Sunk cost) The cost of the current website, even if it were reused for the application, is irrelevant. Any cost mitigation it provides would be accounted for in development time and resources.
• Testing Software (Committed cost) Regardless of the option chosen, the same testing software will be used.
• The cost of the iOS Application (Sunk cost) - Like the existing website, the cost of the iOS application is irrelevant to this decision.

Step-by-step explanation

• Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process. As an example, relevant cost is used to determine whether to sell or keep a business unit.

• Management uses relevant costs in decision making, such as whether to close a business unit, whether to make or buy parts or labor, and whether to accept a customer's last minute or special orders
• The opposite of a relevant cost is a sunk cost.