Relevant Costs and Benefits in Decision-Making: An Introduction

Abstract

This note presents an introduction to relevant costs and benefits—those costs and benefits that differ between two alternatives in decision-making. The note provides important terminology around this concept and an example to illustrate this idea in action.

Excerpt

Relevant Costs and Benefits in Decision-Making: An Introduction

This note lays out an approach to evaluating the financial impact of many decisions that you as a manager might need to make. Note that the financial impact is only one factor to consider when making decisions. Of course, there are nonfinancial factors that come into play that you should consider along with the financial impact. But our focus in this note is on the financial implications.

Let's think of management decision-making in five steps:

Define the decision that needs to be made.

Identify the alternative courses of action.

Gather information that is relevant to making the decision.

. . .

Keywords: relevant costs and benefits, relevant costs, relevant benefits, decision-making, sunk costs, future costs, opportunity costs