In short-term decision making, which costs are relevant?

In short-term decision making, which costs are relevant?

• A. Only fixed costs
• B. Mixed costs
• C. Fixed and variable costs
• D. Only variable costs

Answer: (D)

In short-term decision making, focus on the costs that will actually change because of the chosen option. Fixed costs are usually committed in the short term and don’t change with the decision, so they aren’t relevant. Variable costs, on the other hand, vary with the level of activity, so they differ between options and are the costs you compare. For example, when deciding whether to make or buy, the relevant figures are the materials, direct labour, and variable overhead that would be incurred or saved under each option; fixed overhead remains the same in the short term and isn’t included. Therefore, the costs that are relevant in the short term are the variable costs.

In short-term decision making, focus on the costs that will actually change because of the chosen option. Fixed costs are usually committed in the short term and don’t change with the decision, so they aren’t relevant. Variable costs, on the other hand, vary with the level of activity, so they differ between options and are the costs you compare. For example, when deciding whether to make or buy, the relevant figures are the materials, direct labour, and variable overhead that would be incurred or saved under each option; fixed overhead remains the same in the short term and isn’t included. Therefore, the costs that are relevant in the short term are the variable costs.