Incremental costs are relevant in making short-term decisions or choosing between two alternatives, such as whether to accept a special order. If a reduced price is established for a special order, then it's critical that the revenue received from the special order at least covers the incremental costs.

Which of these are not relevant costs?

Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.

How are relevant costs used in incremental analysis?

Relevant costs are also referred to as avoidable costs or differential costs. For a cost to be considered a “relevant cost,” it must be incremental, result in a change in cash flow, and be likely to change in the future. Hence, a relevant cost arises due to a particular management decision.