#MarketRebound Discuss Cost Classification for Decision-Making.

To make effective decisions, management must consider future costs and benefits. Key cost types include:

1. Differential/Incremental Cost:

The cost difference between two alternatives. A decision is favorable if incremental revenue exceeds this cost.

2. Relevant and Irrelevant Costs:

Relevant costs are future costs that vary between alternatives. Irrelevant costs remain unchanged regardless of the decision.

3. Opportunity and Imputed Costs:

Opportunity cost is the benefit lost when choosing one option over another. Imputed costs are not recorded in accounts but considered for decision-making (e.g., required return on investment).

4. Sunk and Out-of-Pocket Costs:

Sunk costs are past costs that can't be recovered (e.g., depreciation). Out-of-pocket costs are future cash expenses that directly impact decisions.