When talking about the relevance of costs, there are several cost terms that are important to understand. Sunk costs, future costs, also known as outlay costs or out-of-pocket costs, and opportunity costs. Let's discuss these in a bit more detail, starting with sunk costs. Sunk costs are costs that are incurred because of a past decision that cannot be changed or avoided. Sunk costs usually are not relevant costs because an organization will incur those regardless of which alternative it chooses. An example, well, consider the cost of a machine purchased previously. That cost is not relevant when considering whether to replace the machine. Likewise depreciation, which is essentially the allocation of that cost to different periods, is not relevant either. But, if you can sell the old machine after replacing it with a new machine, the proceeds you would get from selling it are relevant to the decision. Next, future costs. Future costs require a future outlay of cash. They're also called out-of-pocket costs or outlay costs. Future costs can be changed or avoided depending on the decision that the organization makes. As a result, future costs are typically relevant costs when making a decision. And finally, opportunity costs. Opportunity costs are benefits that the organization forgoes as a result of deciding to pursue a particular alternative. Opportunity costs can be changed or avoided, depending on the decision the organization makes. As a result, these two are typically relevant costs when making a decision. An example, well suppose you are considering quitting your job and going back to graduate school to get a graduate degree. The salary you give up is an opportunity cost of going back to school. It's a benefit that you give up by choosing the going back to school alternative. Now, lets think briefly about relevant benefits. Those can include things like future revenues and those future revenues would be relevant to a decision if they differ between the alternatives being considered. Another example is proceeds the organization receives if it disposes of or it sells something. If those differ between the alternatives being considered, then they are relevant. These are just a few examples of relevant benefits.