 and welcome to this session. This is Professor Farhad in which we would look at relevant cost and irrelevant cost in a non-routine decisions. We're going to start by discussing what's relevant and irrelevant. Then we will discuss briefly what are non-routine decisions and how do we use relevant costs and an irrelevant cost in those type of decisions. Relevant cost or even relevant benefit or revenue are cost or revenues that differ between alternatives. So how do we consider something that's relevant? Well, we have to focus on the differences between decisions not similarities. So if there are differences in terms of cost or revenue, we consider the cost or the revenue as relevant. I'm going to start with a simple example to illustrate the big concept. Then we will focus a little bit more on specific examples and we use numbers. Think about hiring two employees. If you're hiring two employees, we're going to start to evaluate them. Okay, this is employee one and this is employee two. Employee one, they have a four-year degree. Employee two, they have a four-year degree. Those are similarities. It doesn't really matter. We don't focus on those because they both have a four-year degree. Point number two, they both pass the CPA exam. They both pass the CPA exam. Again, this is not relevant. Why? Because they are, they both have the CPA exam. One have zero years of experience and one will have two years of experience. Hold on a second. Now from an experience perspective, we have differences. So what we're looking at are differences. And this is called differential analysis, looking at differences. And specifically when we are doing those differential analysis, we're going to have to look at future revenues and future costs that differ among alternatives. And this is what we are looking at here. What are relevant? Focus on relevant costs and relevant benefit or revenue that's going to differ between alternative in the future. This is what we mean by making differential analysis. So any cost that's avoidable, any cost that we can avoid or any benefit that we can incur in the future is considered relevant. So if we can avoid a cost, that's a relevant cost. If we can, if we can generate additional revenue, that's relevant revenue because we can generate this additional revenue. So costs that can be eliminated in whole or in part and selecting one option over the other is considered relevant. So any cost that we can get rid of, in part or in whole, the whole thing or part of it, well, that becomes irrelevant for our decision. Therefore, we call it relevant cost and we'll take it into account when we are making those non routine decisions, which we'll talk about in a moment. Having said so, we can also state that unavoidable cost, unavoidable costs are obviously irrelevant costs, because they cannot be avoided. What are some examples of unavoidable cost? Well, unavoidable cost, something like something called sunk cost. Sunk cost is a cost that already incurred. We incur that cost and there's no way we can change it at this point. We purchase a machine in the past. Well, we are making a future decision. Purchasing that machine from the past is irrelevant to us because we cannot change that decision anymore. And cost that generally that don't differ between alternative is also called unavoidable cost. Now, we're going to be looking more at, we're going to be giving more specific example about relevant cost, but this is basically the big picture. Before we proceed any further, I would like to remind you whether you are a student or a CPA candidate, and this is mostly likely who you are. If you're watching, please take a look at my website, farhatlectures.com. I provide you additional resources for your accounting courses as well as the CPA exam. I don't replace your CPA review course. I'm a useful addition. If you have not connected with me on LinkedIn, please do so. Like this recording. If you're watching, please like it. It's going to help you. It's going to help others connect with me on Instagram, Facebook, Twitter, and Reddit. So let's talk now about routine versus non-routine decisions because relevant costs are mostly relevant and irrelevant costs are mostly related to non-routine decisions. What are routine decisions? Routine. These decisions are made frequently to run the company, like ordering supplies, paying vendors, paying employees, running the company on a day-to-day basis. Non-routine decisions are a little bit different. They use a unique set of conditions or conditions to make decisions. So those are different non-routine decisions. Specifically, we're going to be covering four types of non-routine decisions, add or drop a product or a segment, make or buy decision or basically make or outsource, special orders, accept or reject an order, sell a product or process further. And when we are dealing with those non-routine decisions, we have to know specifically what is irrelevant costs. So we're going to be looking at some examples. Again, any avoidable cost is irrelevant cost. Like what? Any future variable production costs. So when you're looking in the future, whether to make a decision or not, any variable production costs such as direct material, direct labor, variable overhead, notice the variability. Those costs are variable. Any future variable selling or shipping costs that you are going to incur, that's relevant cost. Any future fixed costs, be careful, incurred specifically for this project or decision. For example, if you need to buy a special machine, because we are undertaking this project, it's a special non-routine decision. Although the cost is fixed, if it's specifically for this project, then it becomes relevant cost, thus taken into account when you are making that decision. Any future opportunity cost, what is opportunity cost? Something that you deliberately forgone, you gave up. Well, if that's the case, you gave it up, then that's a cost because you could have did that instead of doing what you are doing now. You got to ignore cost and benefit that don't differ. And remember, cost in one context could be relevant and another context could be irrelevant. So each case is different. So you have to be careful and obviously we'll work examples down the road and you can go to the website and look at examples. But the best way to illustrate this is to look at a simple example, just to kind of get familiar with what's relevant, what's not relevant. Adam is a college student in Philadelphia, is considering visiting his friend in New York. Adam can drive his car, specifically in New York City. Adam can drive his car or take Amtrak from Philadelphia to New York. Using a car at the 100 miles to his friend's apartment, which alternative should Adam uses? And this is the cost. Well, the car depreciation per year is 2,500 or is 25 cent per mile. Adam will have to pay for gasoline. So let's start with the car depreciation. So we're choosing between driving the car or taking the train. Would the car depreciation be considered irrelevant or irrelevant cost? Well, think about it. Whether you take the train or use the car, the depreciation will be the same. Therefore, it's irrelevant. It doesn't differ between the decision. Cost of gasoline is 30 cent per mile. Is the cost of gasoline relevant? I would say, yes, it is. Because if you drove the car, you're going to spend 30 cent per mile. If you don't drive the car, you don't spend anything. Therefore, it's irrelevant. Therefore, we will take it into account when we are making our decision. Insurance for the car and the license to have the car. It's 1,500 per year per mile. It's 15 cent per mile. Well, would it make a difference whether you pay insurance or not pay insurance, whether you took the train or drove the car? And the answer is, it doesn't matter. Therefore, it's irrelevant. You need the insurance, whether you drive the car or you take the train. Maintenance and repair, it's 5 cent per mile. So every additional mile you drive, the estimate is you have to incur additional 5 pennies in repair and cost. Would you say that's relevant? I would say yes, because if you drove 100 miles, that's going to change. Therefore, we'll be considered relevant. Parking fees at school. Well, Adam paid 200 dollars per year for parking his car at the school in Philadelphia. Now he's going to drive his car to New York. Would that make a difference? It doesn't. Because you're going to have to pay the fee, regardless whether you keep the car in that parking lot in Philadelphia or drive the car to New York. Therefore, parking the fees at the school is a student in Philadelphia. That's irrelevant. Reduction in sale value. Well, for every mile you drive, there's a reduction in sale value of 3 pennies. Would that be relevant? Well, I would say yes, because if you drive your car, it makes a difference. That's a relevant cost. Amtrak fare, which is the train fare, 105 dollars. You have to pay that 105 dollars. Would that be irrelevant or irrelevant cost? Definitely relevant, because whether you took the train or you drove the car, it makes a difference to your budget. Therefore, it's relevant. Obviously, this one is relevant. Cost of putting dog and kennel while gone. So, Adam has a dog and if he's going to drive, go to New York, he's going to have to pay 50 dollars. Would that be relevant or irrelevant cost? Whether he take the train or drive the car? And the answer is, it's irrelevant. Although it's a future cost, it doesn't really matter. Because whether Adam took the train or Adam drove his own car, he still have to pay 50 dollars to take care of that dog. Hassell of parking in New York. Well, we don't know the cost of that. Well, that's hard to quantify. Benefit or hassle have a car in New York, because having a car in New York City, often it's a hassle or it could be a benefit. Again, it's hard to quantify. The point I'm trying to make is there are other factors that can play into the decision in the real world, but you cannot quantify them. You cannot put a number on them. Cost to park the car in New York per day is 25 dollars. Now, it's the parking fee, but that's in New York. Would it make a difference whether you drive the car or take the train? And the answer is yes, because if you take the train, you don't have to worry about this 25 dollars. If you drive the car, you have to worry about this 25 dollars. Therefore, it's relevant cost. Now, we are ready to kind of use numbers. Cost of driving the car will be 100 miles times 30 pennies, which is 30 dollars. Maintenance and repair will be costing an estimate of five dollars. Lost value is three dollars. Parking for two days in New York is 50 dollars. Therefore, if Adam wants to drive the car, it will cost him approximately 88 dollars versus taking an Amtrak train, which will cost 105 dollars. Now, from a strictly numbers perspective, Adam will choose to drive his car overtaking the train. Now, from a personal perspective, I would prefer to take the train. But the point is, there are quantitative factors, such as dollar amount, whether Adam drives his car to New York or takes the train, and there are non quantitative factors. For example, I'll prefer to pay the additional amount above 88 and take the train because it's a hassle. It's a hassle. I hope this session clarifies relevant versus irrelevant costs. What should you do now? Go to farhatlectures.com and look at multiple choice through false questions that's going to help you understand this concept better because you need to understand relevant and irrelevant costs when it comes to non-routine decisions. Good luck, study hard, and of course, stay safe!