How Do You Answer Relevant Costing Questions in ACCA PM?

Relevant costing is a staple of ACCA PM, and it's marked as much on judgement as on arithmetic. A relevant costing question gives you a decision — accept a contract, make or buy, use scarce resources — and a pile of cost information, some of which is a trap. The marks go to candidates who include only the costs that genuinely change because of the decision, and justify why each one is or isn't relevant.

The relevant cost test

A cost is relevant only if it is a future, incremental cash flow that arises because of the decision. Apply all three parts of the test to every figure:

• Future — costs already incurred (sunk costs) are never relevant, however large.
• Incremental — only costs that change as a result of the decision count; committed and unavoidable costs are excluded.
• Cash flow — non-cash items such as depreciation and apportioned fixed overheads are ignored.

Rule 1: Materials — replace or forgo

The relevant cost of material depends on whether it's in regular use. If the material is used regularly, its relevant cost is the replacement cost, because using it now means buying more. If it's surplus with no other use, the relevant cost is its scrap or resale value forgone — often zero. The original purchase price is sunk and irrelevant either way.

Rule 2: Labour — spare capacity, overtime or displacement

If there's spare labour capacity being paid anyway, the relevant cost is nil. If extra labour must be paid for through overtime or hiring, that incremental cost is relevant. If skilled labour is fully employed and must be taken off other work, the relevant cost includes the contribution lost from that displaced work — the opportunity cost.

Rule 3: State your reasoning, not just the number

Marks are awarded for explaining why a cost is included at a particular value or excluded altogether. A schedule of figures with no justification earns far less than one where each line says 'sunk — excluded' or 'replacement cost, as material is in regular use'. The reasoning is the answer.

The takeaway

Relevant costing rewards a disciplined test applied to every figure: future, incremental, cash. Treat materials by replacement or resale forgone, labour by spare capacity or opportunity cost, and justify every inclusion and exclusion. The traps are deliberate — name them.

The difficulty is that an irrelevant cost looks perfectly reasonable sitting in your schedule — you can't easily see the sunk cost you shouldn't have included. The 50% Club marks your practice PM answers against the official ACCA scheme, showing exactly where a cost was wrongly included or a justification was missing — so your relevant-cost logic scores.