Revenue and Cost Relevance in Cost Accounting
In cost accounting, relevant means that you consider future revenue and expenses. Also, relevant means that a cost or revenue will change, depending on a decision you make. Past costs are water under the bridge, and if the costs or revenue remain the same no matter what you decide, they aren’t relevant.
Relevant costs and relevant revenue have an impact on your profit. You should pay the most attention to these numbers. Get these numbers “right,” and you can be more profitable. You get numbers right by analyzing relevant costs and relevant revenue, using what’s called a decision model.
A relevant amount is not necessarily a material amount. If you were closing a factory, the cost you pay for trash removal at the factory location would be relevant. If the factory stays open, you pay for trash removal. If you close the factory, you no longer pay for the service. So your decision determines whether or not you have the trash removal cost.
While the trash removal cost is relevant, it may not be material. Materiality refers to the dollar amount of the cost. Most accountants determine a minimum dollar amount for materiality. Amounts below the minimum are ignored. If the relevant decisions for the plant closing total $1,000,000, a $600 decision about trash pickup may not be material.
It helps to define a term by explaining what it isn’t. A relevant cost isn’t a past or sunk cost. Sunk costs are done deals and are irrelevant moving forward. They’re already paid, and you can’t change them.
Say you make the lease payment on your factory on the first day of the month. Later, on the 15th, you make a decision about which product to produce for the rest of the month. Your lease payment is important (of course), but it’s not relevant to the production decision. That’s because the lease payment can’t be changed for the remainder of the month.