Relevant cost: A cost that differs among the alternatives in a particular decision and will be incurred in the
future. In managerial accounting, this term is synonymous with avoidable cost and differential cost.
Avoidable cost: Any cost that can be eliminated (in whole or in part) by choosing one alternative over another
in a decision-making situation. In managerial accounting, this term is synonymous with relevant cost and
Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.
In managerial accounting, the terms avoidable cost, differential cost, incremental cost, and relevant cost are
often used interchangeably.
KEEP OR DROP A PRODUCT/SEGMENT
Relevant Costs and Benefits
Contribution margin (CM) lost if dropped
Fixed costs avoided if dropped
CM lost/gained on other products/segments
Allocated common costs
Keep if CM lost (all products/segments) > fixed costs avoided + CM gained (other products/segments)
Drop if CM lost (all products/segments) < fixed costs avoided + CM gained (other products/segments)
Vertical integration: The involvement by a single company in more than one of the steps of the value chain
from production of basic raw materials to the manufacture and distribution of a finished product.
Make or buy decision: A decision as to whether an item should be produced internally or purchased from an
MAKE OR BUY
Incremental costs of making the product (variable and fixed)
Opportunity cost of utilizing space to make the product
Outside purchase price