Classification of costs for decision making

Classification by relevant and irrelevant costs

Relevant costs – future costs which will be changed by a decision.

Irrelevant costs – costs which will not be affected by a decision.

Sunk costs

Costs that have been created by a decision in the past and which cannot be changed by any decision that will be made in the future.

Sunk costs are irrelevant for decision-making.

Opportunity costs

A cost which measures the opportunity which is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up.

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