Shared from the 2/21/2017 American Press eEdition

Guest Commentary

Making rational business decisions


Are you making rational business decisions? Most people, by nature, do not. That’s right – we have to learn to make rational decisions so that the heart does not overtake the mind. We need to overcome the desire to continue to throw good money after a losing pet project.We also need to overcome the temptation to fixate on past costs. Neither bad habit is rooted in best practices for business decision making.

Instead, we need to learn about the decision-making concepts known as “relevant costing,” whereby the only relevant costs are those future costs and revenues that differ across alternatives. That is all there is to it. If you focus on the future, and the implications of the alternatives you are considering for the future, your decision is much easier to make.

Of course, not all factors in decision-making can be quantified, so judgment is still needed. Yet, if you keep your future orientation you will indeed focus on the relevant consequences.

Most of us need more help that just this one fundamental principle. In fact we need two additional principles. First, we also need to consciously realize that past costs are sunk and are therefore irrelevant. Nothing we decide today can change what already happened. Leave the past in the past. It cannot change the future any longer.

Second, we need to seek out opportunity costs, which may or may not be present. An opportunity cost is the foregone margin which is given up in order to accept an alternative use of our resources. For example, every college student who foregoes full time employment in order to go to college incurs the opportunity cost of a full-time salary. And every college student who works full time earns his or her degree slower than if not working, thus delaying graduation. For this reason, the opportunity cost is the ability to work at one’s profession earlier and earn a professional salary for longer in one’s career.

To use a business situation, consider a manufacturing plant that has unused space. The excess space could be (a) rented out (subletted) or (b) used for the construction of a civic project which will be donated to the city. The civic project will be a source of pride for the community and reflect well on your business, but the opportunity cost is the rent revenue foregone. If incremental costs are involved with renting the space, the opportunity cost is the net of the two. If the business can afford the opportunity cost (lost margin), the civic project may be well worth pursuing – illustrating that not all decisions boil down to the quantifiable impact on the bottom line. Nonquantifiable aspects, such as community goodwill, may still win out. The point is to simplify the process of making a good decision by keeping the relevant figures in focus.

To keep your attention on the rational factors of your business decision, begin my writing down all the future costs and revenues that differ between or among alternatives. If a sunk cost or two made it onto your list, promptly erase it (them) so as not to be distracted. Finally, consider if there is an opportunity cost to add to your list. This systematic method of analyzing business decisions will make your life easier and will benefit your business bottom line.

Relevant costing can used in a wide variety of business decision contexts including outsourcing, scarce resource, special projects, special orders, obsolete inventory and much more.


Kay Zekany, , Ph.D., CMA is Assistant Professor of Accounting at McNeese State University. Contact her at 475-5538 or

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