Irrelevant Cost

An irrelevant cost is a managerial accounting term that represents a cost, either positive or negative, that would not be affected by a management decision. Such expenses are therefore ignored when that decision is made.

Classifying costs as either irrelevant or relevant, is useful for managers making decisions about the profitability of different alternatives. Costs which stay the same, regardless of which alternative is chosen, are irrelevant to the decision being made.

Fixed overhead and sunk costs are examples of irrelevant costs that would not affect the decision to shut down a division of a company, or make a product instead of purchasing it from a supplier. For example, if a company bought a machine that broke and could not be returned, this sunk cost would be irrelevant to the decision to replace the machine or get a supplier to do the manufacturing. Likewise, the wages of employees retained after the sale of a division, would be irrelevant to the decision to sell it.

The book value of fixed assets like machinery, equipment and inventory are another example of irrelevant sunk costs. The book value of a machine is a sunk cost which does not affect a decision involving its replacement.

Because an irrelevant cost may be a relevant cost in a different management decision, it is important to formally define and document costs that should be excluded from consideration when reaching a decision.