Short-term decisions

Relevant cost:

Relevant cost are future cash flows,  arising as a direct consequence of a decision. that means relevant costs are future cost, cash flows and incremental cost.

Variable cost will be relevant cost. And Fixed Cost are irrelevant to a decision.

Sunk cost, fixed Cost, Committed Cost, Unavoidable cost are not relevant cost.

What is opportunity cost?

An opportunity cost the value of the benefit sacrificed when one course of action is chosen, in preference to an alternative.

Example:

X limited has 500 kg of material K in inventory for which it paid $2000. The material is no longer in use in the company and could be sold for $1.50 per kg.

X limited considering taking on a single special order which will require 800 kg of material K. The current purchase price of material K is $5 per kg.

In the assessment of relevant cost of the decision to accept the special order, the cost of material K is.

ANS: An opportunity cost of $750 and an increment cost of $1500

Why?

500 kg of material which has already in the company and has no option for use so it may sale @ $1.5 and new order need 800 kg so Company has 500 already which they can sold. In this case they can use it for new order  so it is An opportunity cost the value of the benefit sacrificed when one course of action is chosen, in preference to an alternative.