What is Relevant Cost?
A relevant cost is a future cost that varies depending on the alternative chosen. To qualify, the cost must (1) lie in the future and (2) differ between the options under consideration. Sunk costs and costs that are the same across alternatives are irrelevant.
How It Works
- List every cost associated with each option.
- Remove all sunk costs already paid in the past.
- Remove costs that are identical in both alternatives.
- Keep the remaining costs as relevant and use them with relevant revenues to make the decision.
Saudi Context
Saudi CFOs apply relevant cost analysis when evaluating Vision 2030-related expansion projects, special export pricing, and contract bids. The analysis is also documented for board approvals required under the Saudi Companies Law for major capital commitments.
Example
A factory in Dammam evaluates whether to accept a special export order. The depreciation on existing machinery is irrelevant (already incurred); the extra raw materials and overtime labour are relevant and form the basis of the pricing decision.