Final answer:
In Relevant Costing, fixed costs that do not change across decision alternatives are considered irrelevant and can be ignored because they do not affect the decision. It's the variable costs that are important since they can influence the firm's ability to alter expenses in line with production changes.
Step-by-step explanation:
In the context of Relevant Costing, fixed costs are costs that do not fluctuate based on the level of production or business activity within a certain capacity. If fixed costs remain constant across different decision alternatives, they are considered irrelevant costs because they do not impact the decision-making process. That is because, in the short run, these costs are often sunk costs and cannot be recovered or changed regardless of which alternative is selected. It's the variable costs that tend to be relevant in such scenarios because they can vary with production levels and provide information on the firm's capacity to reduce expenses or face increased costs if production volumes are adjusted.
Therefore, the fixed costs can be ignored when comparing alternatives in a relevant costing analysis because they do not affect the incremental cost of one decision over another. This simplification allows decision-makers to focus on the costs and revenues that will change as a result of the decision, ultimately affecting the firm's profitability.
For example, suppose a firm must decide whether to continue producing a product or to stop production. The rent for the factory where the product is manufactured is the same whether the product is made or not, and thus, the rent cost is irrelevant to this decision. What matters here are the costs that would change, such as materials and labour directly associated with the product's production, which are the relevant costs to be considered.