Skip to content
Log in
← Glossary

relevant cost

Also called: relevant costs, incremental cost, differential cost

A future cost that differs between the options being compared. Only relevant costs and revenues belong in a decision.

A relevant cost is a future cost that differs between the options being compared. Only relevant costs and revenues belong in a decision; everything else is the same in every option and cancels out. The test is one question: what changes if we choose A rather than B?

Three kinds of numbers fail the test. Money already spent is gone whatever happens (a sunk cost). Costs that continue either way, such as salaries of a team that stays, rent or allocated overhead, don't differ. And averages built for reporting, such as a full cost per unit with a share of fixed costs, mix relevant and irrelevant parts. What passes: the extra cash out (a contractor, a licence, a variable cost per unit), the extra cash in, and the opportunity cost of the capacity or people the option uses.

Relevance depends on the decision, not on the cost. The same tutor payout is relevant when deciding whether to add a lesson and irrelevant when deciding which logo to use; the same spare capacity is free in a quiet month and expensive in a full one. That is why a lowest acceptable price is never a fixed number.

Example

A company client offers Klasna 200 English lessons at 520 UAH each, paid by bank transfer (no card fee). The relevant costs per lesson are the tutor's 390 and video and AI 30: 520 − 390 − 30 = 100 UAH of contribution. Salaries, the office and the platform cost the same either way and stay out.

In July tutors have free hours, so 200 lessons add +20,000 UAH. In May they are fully booked, so each corporate lesson replaces a family lesson that would have left 184.50: 100 − 184.50 = −84.50 a lesson, −16,900 UAH in all.

The lowest acceptable price in May is the relevant cost plus the contribution displaced: 390 + 30 + 184.50 = 604.50 UAH.

Common mistakes

  • Using full cost per unit. It includes fixed costs that don't change with the decision.
  • Counting costs that continue either way. Salaries of a team that stays are the same in both options.
  • Forgetting displaced contribution. When capacity is full, the work the option pushes out is a relevant cost.
  • Letting past spending in. What has already been paid can't differ between options.
  • Reusing yesterday's answer. A cost relevant in one decision or season may not be in the next.

Learn it in the course