Final answer:
Relevant costs, like direct materials and labor costs for a product, can be avoided if decisions change, whereas irrelevant costs, like equipment depreciation, occur no matter the decision. Implicit costs are opportunity costs of utilizing owned resources, like using a building for operations instead of renting it out.
Step-by-step explanation:
To distinguish between relevant (avoidable) and irrelevant (unavoidable) costs, we should understand the concepts of explicit and implicit costs. Relevant costs, also known as avoidable costs, refer to those costs that can be eliminated if a particular decision is not pursued. For instance, if a company chooses to discontinue a product line, the direct materials and labor costs associated with that product line are relevant costs, as they can be avoided if the product line is no longer produced.
Irrelevant costs, or unavoidable costs, are those that will occur regardless of the decision made. These often include sunk costs, which are past expenses that cannot be recovered. An example of an irrelevant cost is the depreciation of equipment that will continue to depreciate regardless of how many units are produced or if a product line is discontinued.
Implicit costs, which represent the opportunity cost of using resources the firm already owns, can also be considered when making decisions, as they reflect the potential benefits that are foregone by utilizing the resources in the current way. Examples include using a building the company owns for operations instead of renting it out, or an owner's time spent on the business that could have been used to earn a salary elsewhere.