Where Knowledge Meets Awareness
Decision-making cost refers to the costs that are relevant for making specific managerial decisions. These costs are future-oriented and help managers evaluate the consequences of different alternatives before choosing the most appropriate course of action. They may vary depending on the decision context and are not always recorded in accounting records.
| Type | Description | Example |
|---|---|---|
| Relevant Cost | Costs that affect a specific decision | Material cost for a special order |
| Sunk Cost | Already incurred and irrecoverable cost | Old machinery cost already paid |
| Opportunity Cost | The value of the next best alternative foregone | Rent from unused space given up for storage |
| Incremental Cost | Additional cost incurred due to a decision | Extra cost for taking a new order |
| Marginal Cost | Cost of producing one additional unit | Cost of producing one extra product |
| Shutdown Cost | Cost that continues during plant closure | Security, insurance, maintenance |
| Replacement Cost | Cost of replacing an existing asset | Replacing an old vehicle |
A company receives a special order for 500 units at a price lower than usual. If the variable cost per unit is ₹50 and fixed costs remain unchanged, and the special order price is ₹60 per unit, the decision-making cost (relevant cost) is ₹50 per unit. Since ₹60 > ₹50, the order should be accepted.
