Relevant Costs:

Relevant costs are future cash flows that will occur as a direct consequence of a decision. These costs must satisfy the following criteria:

1. Future Costs: They must be costs that will be incurred in the future. Past costs, also known as sunk costs, are not relevant.
2. Cash Flows: They must involve cash flows, meaning they result in an actual financial outflow or inflow.
3. Direct Consequence of the Decision: They must arise directly from the decision being considered. Costs that will be incurred regardless of the decision are not relevant.

Sunk costs and committed costs are not considered relevant costs in decision-making.

(Total: 3 marks)