Question

Reading what the difference is between relevant and irrelevant cost to fully understand that it represents a cost that can be either negative or positive. This cost would only change depending on the management decision and how it can affect the business. The last 4 years I have worked in the staffing industry, 4 offices today in which they all run very different from each other. Three of the offices are local with the exception of one being a nation-wide search firm in various industries. Last year I worked for Lucas Group, an executive search group that locally had an accounting and finance division. The office essentially had two divisions within their accounting and finance group, one being the executive (permanent placement) and the contract solutions (temporary and contract to hire). When I joined the group in May 2018, both groups were active in house, with recent hires trying to reestablish the credibility of the firm. It had a rough patch of high turn over in the previous months. In the 6 months to come there were rumors that they would be getting rid of the contact solutions division in Phoenix, because it was not profitable. The division was actually negative $200,000, that was including overhead cost. The last resort was to bring in a leader specifically to mold this team and bring it to success. She led the team for 4 months and no changes were seen. The office itself was not losing money because the executive team carried most of the billings and fees. The decision was made to close the Phoenix Contract solutions team, I think that in order to have potentially saved the division, management should have seen the sinking whole they were in and tried to make changes. What could have helped from the beginning was making themselves known in the valley, having client visits, reaching out to business about the services we offered. None of that was done even when a leader was appointed to the division. I have seen the difference between having client visits and being very involved with the community versus only making calls and sending emails.

What can be done differently?

Answer 1

The classification of costs between relevant costs and irrelevant costs is important in the context of managerial decision-making.

In any managerial decision involving two or more alternatives, the prime focus of analysis is to find out which alternative is more profitable. The profitability of alternatives is determined by considering the revenues generated by and costs incurred under each alternative. Some costs may stay the same regardless of which alternative is chosen while some costs may vary between the alternatives. The classification between relevant and irrelevant costs is useful in such situations.

Examples of situations in which the relevant vs irrelevant classification is useful include decisions regarding:

• Shutting down a division of a business,
• Accepting an special order at lower price,
• Making a product in-house or purchasing it from outside,
• Selling a semi-finished product or processing it further, etc.

Relevant costs

Relevant costs are costs that are affected by a managerial decision in a particular business situation. In other words these are the costs which shall be incurred in one managerial alternative and avoided in another. As the name suggests they are ‘relevant’ for managerial analysis and should be considered in all calculations made for the purpose.

Irrelevant costs

Irrelevant costs are costs that are not affected by the ultimate decision. In other words, these are the costs which shall be incurred in the all managerial alternatives being considered. Since they are the same in all alternatives, they become irrelevant and need not be considered in calculations made for managerial analysis.

One should incur the cost to expand their business.

One of the most lucrative ways to improve your business is to attract your competitor’s customers to your business. Consumers will switch brands and businesses if they can see real value, so you need to give them a pretty good reason to choose your business over your competitors.  

Thorough competitor analysis is the strategic way of developing a clearer picture of what's happening in the market and giving you a basis to develop your own action plan. Follow these steps to make your business irresistible to your competitor’s customers:

1. Lower your prices

2. Create brand loyalty

3. Raise your profile

4. Encourage brand advocates

5. Find the gap.

6. Support your customer.