What is an Irrelevant Cost?

An irrelevant cost is a cost that will not change as the result of a management decision. However, the same cost may be relevant to a different management decision. Consequently, it is important to formally define and document those costs that should be excluded from consideration when reaching a decision.

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Examples of Irrelevant Costs

There are many examples of irrelevant costs, which will vary depending on the nature of the decision being made. Here are several examples:

Accounting salaries. A company is considering installing a warehouse management system (WMS) that will make it much easier to track inventory. While this system will make it easier for the accounting staff to compile the month-end inventory valuation, it will not impact the number of people employed within the accounting department. Consequently, accounting salaries are irrelevant costs within the context of the decision to acquire the WMS software.
Investor relations compensation. The salary of an investor relations officer may be an irrelevant cost if a management decision relates to issuing a new product, since dealing with investors has nothing to do with that particular decision. However, if the board of directors is considering taking the company private, then it may no longer need an investor relations officer; in the latter case, this person’s salary is highly relevant to the decision.
Production rent. The rent for a production building is irrelevant to the decision to automate a production line, as long as the automated equipment is still housed within the same facility.

Types of Irrelevant Costs

There are several general categories of costs that are frequently classified as irrelevant costs for many decisions. They are as follows:

Non-cash items, such as depreciation and amortization, are frequently categorized as irrelevant costs for most types of management decisions, since they do not impact cash flows.
Sunk costs, such as the purchased cost of a fixed asset that was incurred in a prior period, are also usually considered irrelevant when making decisions on a go-forward basis.
Committed costs are also usually considered irrelevant, since these are future costs for which the firm has made a firm commitment that cannot be abrogated.