Management and Organizational Studies 3370A/B Chapter Notes - Chapter 12: Target Costing, Variable Cost, Watch

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3370A/B
• Professor: Bill Dawson

Document Summary

A relevant cost is a cost that differs between alternatives. An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Two broad categories of costs that are never relevant in any decision are: sunk costs, future costs that do not differ between the alternatives. Step 1 eliminate costs and benefits that do not differ between alternatives. Step 2 use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs. Costs that are relevant in one decision situation may not be relevant in another context. One of the most important decisions managers make is whether to add or drop a business segment, such as a product or a store. Let"s see how relevant costs should be used in this type of decision.